DP5538 On the Evolution of Market Institutions: The Platform Design Paradox

Author(s): Carlos Alos-Ferrer, Georg Kirchsteiger, Markus Walzl
Publication Date: March 2006
Keyword(s): asymmetric rationality, evolution of trading platforms, learning, market institutions
JEL(s): C72, D4, D83, L1
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5538

This paper analyses a situation where market designers create new trading platforms and traders learn to select among them. We ask whether 'Walrasian' platforms, leading to market-clearing trading outcomes, will dominate the market in the long run. If several market designers are competing, we find that traders will learn to select non-market clearing platforms with prices systematically above the market-clearing level, provided at least one such platform is introduced by a market designer. This in turn leads all market designers to introduce such non-market clearing platforms. Hence platform competition induces non-competitive market outcomes.