DP13415 Exchange Competition, Entry, and Welfare

Author(s): Giovanni Cespa, Xavier Vives
Publication Date: December 2018
Date Revised: June 2019
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 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.