Competition and Integration among Stock Exchanges in Europe: Network Effects, Implicit Mergers and Remote Access
AbstractThe economic theory of network externalities and a simple game theoretical framework are used to explore the issue of competition among stock exchanges and the possibility of consolidation in the European stock-exchange industry, among the different exchanges. The main features of this paper are the following: the treatment of exchanges as firms; the application of network externalities to study competition among exchanges; the extension of network externalities, through implementing "cross-network" effects; the existence of equilibria where exchanges may decide, even unilaterally, to achieve full com-patibility through implicit mergers and remote access, "specializing" only in trading or listing services. One implication is that consolidation of European exchanges into one may occur with a welfare efficient outcome or with a lock-in to a Pareto-inferior equilibrium. This is due to the network externalities and the different starting points of the various exchanges. "Implicit mergers" among exchanges together with remote access are always weakly (in half of the cases, strictly) more efficient than the actual competition, provided that the fixed cost of compatibility are sufficiently low. This finding sheds light also on the existence and efficacy, especially in the USA, of automated trading systems, which can be seen as exchanges specialized in trading services.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 98-03.
Date of creation: Jan 1998
Date of revision:
Contact details of provider:
Postal: 3301 Steinberg Hall-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104.6367
Web page: http://fic.wharton.upenn.edu/fic/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joseph Farrell & Garth Saloner, 1985.
"Standardization, Compatibility, and Innovation,"
RAND Journal of Economics,
The RAND Corporation, vol. 16(1), pages 70-83, Spring.
- Joseph Farrell & Garth Saloner, 1985.
"Installed Base and Compatibility With Implications for Product Preannouncements,"
385, Massachusetts Institute of Technology (MIT), Department of Economics.
- Joseph Farrell & Garth Saloner, 1986. "Installed Base and Compatibility, With Implications for Product Preannouncements," Working papers 411, Massachusetts Institute of Technology (MIT), Department of Economics.
- Nicholas Economides, 1997.
"The Economics of Networks,"
Brazilian Electronic Journal of Economics,
Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
- Franklin Allen & Anthony M. Santomero, 1996.
"The Theory of Financial Intermediation,"
Center for Financial Institutions Working Papers
96-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Witt, Ulrich, 1997. ""Lock-in" vs. "critical masses" -- Industrial change under network externalities," International Journal of Industrial Organization, Elsevier, vol. 15(6), pages 753-773, October.
- Katz, Michael L & Shapiro, Carl, 1985. "Network Externalities, Competition, and Compatibility," American Economic Review, American Economic Association, vol. 75(3), pages 424-40, June.
- Tapking, Jens & Yang, Jing, 2004.
"Horizontal and vertical integration and securities trading and settlement,"
Working Paper Series
0387, European Central Bank.
- 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.
- Jens Tapking & Jing Yang, 2004. "Horizontal and vertical integration in securities trading and settlement," Bank of England working papers 245, Bank of England.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Thomas Krichel).
If references are entirely missing, you can add them using this form.