DP13415 Exchange Competition, Entry, and Welfare

Author(s): Giovanni Cespa, Xavier Vives
Publication Date: December 2018
Date Revised: June 2021
Keyword(s): Cournot with free entry, Endogenous Market Structure, Industrial Organization of Exchanges, market fragmentation, platform competition, Welfare
JEL(s): G10, G12, G14
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13415

We assess the consequences for market quality and welfare of different entry regimes and exchange pricing policies, integrating 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-à-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.