We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an end-user market . This endogenously leads to a model with transient price impact  . Smooth, diffusive, and discrete trades all incur finite but nontrivial liquidity costs, and can arise naturally from the liquidity takers' optimization.
We study a continuous-time version of the intermediation model of Grossman and Miller (1988). To wit, we solve for the competitive equilibrium prices at which liquidity takers' demands are absorbed by dealers with quadratic inventory costs, who can in turn gradually transfer these positions to an exogenous open market with finite liquidity . This endogenously leads to transient price impact in the dealer market . Smooth, diffusive, and discrete trades all incur finite but nontrivial liquidity costs, and can arise naturally from the liquidity takers' optimization.
R
end-user market
exogenous open market with finite liquidity
D
a model with
A
in the dealer market