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Raising rival's costs in the securities settlement industry

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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.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 376.

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Length: 31 pages
Date of creation: Jul 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040376

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

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References

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  1. Kauko, Karlo, 2002. "Links between securities settlement systems: An oligopoly theoretic approach," Research Discussion Papers 27/2002, Bank of Finland.
  2. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: I. Overview and Nondiscriminatory Pricing," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 1-37, Spring.
  3. 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.
  4. Jens Tapking & Jing Yang, 2004. "Horizontal and vertical integration in securities trading and settlement," Bank of England working papers 245, Bank of England.
  5. Vickers, John, 1995. "Competition and Regulation in Vertically Related Markets," Review of Economic Studies, Wiley Blackwell, vol. 62(1), pages 1-17, January.
  6. Armstrong, Mark & Doyle, Chris & Vickers, John, 1996. "The Access Pricing Problem: A Synthesis," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 131-50, June.
  7. Kauko, Karlo, 2007. "Interlinking securities settlement systems: A strategic commitment?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2962-2977, October.
  8. Jean-Jacques Laffont & Patrick Rey & Jean Tirole, 1998. "Network Competition: II. Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 38-56, Spring.
  9. Thorsten V. Koeppl & Cyril Monnet, 2004. "Guess what: it's the settlements!," Working Paper Series 375, European Central Bank.
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Citations

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Cited by:
  1. Degryse, Hans & Van Achter, Mark & Wuyts, Gunther, 2012. "Internalization, clearing and settlement, and liquidity," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/335865, Katholieke Universiteit Leuven.
  2. 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.
  3. Jonathan Chiu & Alexandra Lai, 2007. "Modelling Payments Systems: A Review of the Literature," Working Papers 07-28, Bank of Canada.
  4. 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.
  5. Serifsoy, Baris & Wei[ss], Marco, 2007. "Settling for efficiency - A framework for the European securities transaction industry," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3034-3057, October.
  6. Jens Tapking & Jing Yang, 2004. "Horizontal and vertical integration in securities trading and settlement," Bank of England working papers 245, Bank of England.
  7. Jens Tapking, 2007. "Pricing of settlement link services and mergers of central securities depositories," Working Paper Series 710, European Central Bank.
  8. 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.
  9. Kauko, Karlo, 2007. "Interlinking securities settlement systems: A strategic commitment?," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 2962-2977, October.
  10. Patrick Van Cayseele, 2004. "Competition and the Organisation of the Clearing and Settlement Industry," Center for Economic Studies - Discussion papers ces0413, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  11. Alexandra Lai & Nikil Chande & Sean O'Connor, 2006. "Credit in a Tiered Payments System," Working Papers 06-36, Bank of Canada.
  12. Giulia Iori, 2004. "An analysis of systemic risk in alternative securities settlement architectures," Working Paper Series 404, European Central Bank.
  13. Baris Serifsoy & Marco Weiß, 2003. "Efficient Systems for the Securities Transaction Industry- A Framework for the European Union," Working Paper Series: Finance and Accounting 120, Department of Finance, Goethe University Frankfurt am Main.

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