Discussion paper
DP17039 Double Auctions and Transaction Costs
We show how transaction costs may fundamentally alter incentives and welfare in markets. We identify two categories of transaction costs. Uniform transaction costs — such as fixed and price fees — guarantee positive revenue and are asymptotically strategyproof, but incur unavoidable dead-weight loss. Discriminatory transaction costs — such as spread fees — can avoid dead-weight loss but lead to complex strategic behavior that depends on traders’ beliefs, even in large markets. Depending on traders’ beliefs, the outcomes range from positive revenue with no dead-weight loss to complete market failure.
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