Sequential entry in illiquid markets

I study the sequential entry of intermediaries into an illiquid market. As intermediaries trade with rational counterparts, market depth affects and is affected by the possibility of entry. This feedback loop between entry and depth gives incumbent intermediaries more incentives to deter entrants, creating endogenous barriers to entry. Further, whether entry occurs or not in equilibrium has distinct effects on market quality: while entry improves depth, reduces spreads, and speeds up price convergence, the threat of entry disciplines only spreads. In a contestable market, more competition leads to higher spreads and intermediaries' counterparties benefit more from deterrence than actual entry.