On the Evolution of Market Institutions: The Platform Design Paradox
University of Cologne - Department of Economics
Université Libre de Bruxelles (ULB) - European Center for Advanced Research in Economics and Statistics (ECARES); CESifo (Center for Economic Studies and Ifo Institute)
Bamberg University - Department of Economics
The Economic Journal, Vol. 120, Issue 543, pp. 215-243, March 2010
We study competition among market designers who create new trading platforms, when boundedly rational traders learn to select among them. We ask whether ‘Walrasian’ platforms, leading to market-clearing trading outcomes, will dominate the market in the long run. If several market designers compete, we find that traders learn to select non-market clearing platforms with prices systematically above the market-clearing level, provided at least one such platform is introduced by a market designer. This in turn leads market designers to introduce non-market clearing platforms. Hence platform competition induces non-competitive market outcomes.
Number of Pages in PDF File: 29
Date posted: February 10, 2010