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Exchange Competition, Entry, and Welfare

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Listed:
  • Giovanni Cespa
  • Xavier Vives

Abstract

We integrate a market microstructure model with an exchange competition model with entry in which exchanges supply technological services that enhance market participation, and have market power. We find that technological services can be strategic substitutes or complements in platform competition. Free entry of platforms delivers a superior outcome in terms of liquidity and (generally) welfare compared to the case of an unregulated monopoly. Controlling entry or, even better, platform fees may serve as an instrument to limit market power, further increasing welfare. The market may deliver excessive or insufficient entry.

Suggested Citation

  • Giovanni Cespa & Xavier Vives, 2018. "Exchange Competition, Entry, and Welfare," CESifo Working Paper Series 7432, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_7432
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    References listed on IDEAS

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    More about this item

    Keywords

    market fragmentation; welfare; endogenous market structure; platform competition; Cournot with free entry; industrial organization of exchanges;

    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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