  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.
