Working Paper: CEPR ID: DP13415
Authors: Giovanni Cespa; Xavier Vives
Abstract: 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.
Keywords: market fragmentation; welfare; endogenous market structure; platform competition; Cournot with free entry; industrial organization of exchanges
JEL Codes: G10; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| free entry into exchanges (G10) | superior liquidity and welfare outcomes (D69) |
| regulatory intervention (controlling entry or platform fees) (D49) | higher welfare outcome (I31) |
| entry of exchanges (F33) | market power of exchanges (D47) |
| market power of exchanges (D47) | liquidity and welfare outcomes (D69) |
| entry of exchanges (F33) | liquidity and welfare outcomes (D69) |