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Raising rival's costs in the securities settlement industry

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  • Holthausen, Cornelia
  • Tapking, Jens

Abstract

The competition between a central securities depository (CSD) and a custodian bank is analysed in a Stackelberg model. The CSD sets its prices first, the custodian bank follows. There are many investor banks each of which has to decide whether to use the service of the CSD or of the custodian bank. This decision depends on the prices and the investor bank's preferences for the inhomogeneous services of the two service providers. Since the custodian bank uses services provided by the CSD as input, the CSD can raise its rival's costs. However, due to network externalities, the CSD's equilibrium market share is not necessarily higher than socially optimal. This result has important policy implications that are related to a discussion currently taking place in the securities settlement industry. JEL Classification: G10, G20, L14

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 0376.

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Date of creation: Jul 2004
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Handle: RePEc:ecb:ecbwps:20040376

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Keywords: network competition; raising rival's cost; Securities settlement;

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References

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  1. Thorsten Koeppl & Cyril Monnet, 2005. "Guess what: It's the Settlements!," Working Papers 1051, Queen's University, Department of Economics.
  2. Kauko, Karlo, 2005. "Interlinking securities settlement systems: a strategic commitment?," Working Paper Series 0427, European Central Bank.
  3. Jens Tapking & Jing Yang, 2004. "Horizontal and vertical integration in securities trading and settlement," Bank of England working papers 245, Bank of England.
  4. Kauko, Karlo, 2002. "Links between securities settlement systems: An oligopoly theoretic approach," Research Discussion Papers 27/2002, Bank of Finland.
  5. Schmiedel, Heiko & Malkamäki, Markku & Tarkka , Juha, 2002. "Economies of scale and technological development in securities depository and settlement systems," Research Discussion Papers 26/2002, Bank of Finland.
  6. Armstrong, M. & Doyle, C. & Vickers, J., 1995. "The access pricing problem: a synthesis," Discussion Paper Series In Economics And Econometrics 9532, Economics Division, School of Social Sciences, University of Southampton.
  7. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
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Citations

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Cited by:
  1. Tapking, Jens, 2007. "Pricing of settlement link services and mergers of central securities depositories," Working Paper Series 0710, European Central Bank.
  2. Séverine Vandelanoite & Frédéric Cherbonnier, 2007. "Enjeux économiques liés à l’intégration des industries du post-marché en Europe," Revue d'Économie Financière, Programme National Persée, vol. 89(3), pages 123-142.
  3. Kahn, Charles M. & Roberds, William, 2009. "Why pay? An introduction to payments economics," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 1-23, January.
  4. Tapking, Jens & Yang, Jing, 2006. "Horizontal and Vertical Integration in Securities Trading and Settlement," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1765-1795, October.
  5. Degryse, H.A. & Achter, M. van & Wuyts, G., 2012. "Internalization, Clearing and Settlement, and Liquidity," Discussion Paper 2012-002, Tilburg University, Center for Economic Research.
  6. Iori, G. & Deissenberg, C., 2008. "An Analysis of Settlement Risk Contagion in Alternative Securities Settlement Architecture," Working Papers 08/03, Department of Economics, City University London.
  7. Mercier, Fabien & Sauer, Stephan, 2013. "Optimal CSD reshaping towards T2S," Working Paper Series 1549, European Central Bank.
  8. Alexandra Lai & Nikil Chande & Sean O'Conner, 2007. "Credit in a Tiered Payments System," DNB Working Papers 126, Netherlands Central Bank, Research Department.
  9. Iori, Giulia, 2004. "An analysis of systemic risk in alternative securities settlement architectures," Working Paper Series 0404, European Central Bank.
  10. Juranek, Steffen & Walz, Uwe, 2010. "Vertical integration, competition, and financial exchanges: Is there grain in the silo?," CFS Working Paper Series 2010/22, Center for Financial Studies (CFS).
  11. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada.

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