Exchange Competition, Entry, and Welfare
68 Pages Posted: 28 Jan 2019 Last revised: 4 Nov 2020
Date Written: November 3, 2020
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. We find that services can be strategic substitutes or complements. Free-entry delivers superior liquidity and welfare outcomes vis-a-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 Classification: G10, G12, G14
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