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Exchange Competition, Entry, and Welfare

Author

Listed:
  • Giovanni Cespa
  • Xavier Vives

Abstract

We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies. To do so, we integrate a microstructure model with a free-entry, exchange competition model where exchanges have market power in technological services. Free-entry delivers superior liquidity and welfare outcomes vis-á-vis an unregulated monopoly, but entry can be excessive or insufficient. Depending on the extent of the monopolist’s technological services undersupply compared to the first best, a planner can achieve a higher welfare controlling entry or platform fees. Review of Financial Studies, forthcoming

Suggested Citation

  • Giovanni Cespa & Xavier Vives, 2022. "Exchange Competition, Entry, and Welfare," The Review of Financial Studies, Society for Financial Studies, vol. 35(5), pages 2570-2624.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:5:p:2570-2624.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab101
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    Cited by:

    1. Babus, Ana & Hachem, Kinda, 2021. "Regulation and security design in concentrated markets," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 139-151.
    2. Babus, Ana & Hachem, Kinda, 2023. "Markets for financial innovation," Journal of Economic Theory, Elsevier, vol. 208(C).
    3. Weill, Pierre-Olivier, 2020. "The search theory of OTC markets," CEPR Discussion Papers 14847, C.E.P.R. Discussion Papers.
    4. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3223-3266.
    5. Hendershott, Terrence & Rysman, Marc & Schwabe, Rainer, 2025. "Stock exchanges as platforms for data and trading," Journal of Financial Markets, Elsevier, vol. 75(C).
    6. Baldauf, Markus & Mollner, Joshua & Yueshen, Bart Zhou, 2024. "Siphoned apart: A portfolio perspective on order flow segmentation," Journal of Financial Economics, Elsevier, vol. 154(C).
    7. Shawn X. Huang & Min Kim & Maria Rykaczewski & Maria Vulcheva, 2025. "Regulation takes a back seat to business concerns: international evidence from stock exchange demutualization," Review of Accounting Studies, Springer, vol. 30(2), pages 1916-1967, June.
    8. Galati, Luca, 2024. "Exchange market share, market makers, and murky behavior: The impact of no-fee trading on cryptocurrency market quality," Journal of Banking & Finance, Elsevier, vol. 165(C).

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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