DP13415 Exchange Competition, Entry, and Welfare

Author(s):	Giovanni Cespa, Xavier Vives
Publication Date:	December 2018
Date Revised:	November 2020
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.