Price Experimentation and Security Market Structure.
We examine the role of market makers in facilitating price discovery. We; show that a specialist may experiment with prices to induce more; informative order flow, thereby expediting price discovery. Market makers; in a multiple-dealer system, unlike a specialist system, do not have the; incentives to perform such costly experiments because of free-rider; problems. Consequently, the specialist system may provide open markets; where bid-ask spreads. We analyze the effect of experimentation on the; bid-ask spread and provide an exploratory analysis of intraday specialist; data that is consistent with our price experimentation hypothesis. Article published by Oxford University Press on behalf of the Society for Financial Studies; in its journal, The Review of Financial Studies.