The Hidden Cost of Zero-Commission

Abstract

This paper studies how transaction cost transparency influences incentives and welfare in two-sided markets. Hidden transaction costs induce price cycles in markets that would be stable with transparent transaction costs. To compete with hidden transaction costs, platforms with transparent costs must reduce them below the optimal monopolist level.  In equilibrium, more risk-averse traders prefer transparent transaction costs, while less risk-averse traders choose hidden transaction costs.  Depending on trader's risk-attitudes, transparent transaction costs can be more or less efficient than hidden transaction costs. Moreover, hidden transaction costs can potentially lead to market failure, as forward-looking traders may exploit price cycles. 

Keywords: Transaction Costs, Market Design, D47, G10, L13, D44, Transparency