Raising Rival's Costs in the Securities Settlement Industry

33 Pages Posted: 6 Dec 2004

See all articles by Cornelia Holthausen

Cornelia Holthausen

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Jens Tapking

European Central Bank (ECB)

Date Written: July 2004

Abstract

The competition between a central securities depository (CSD) and a custodian bank is analysed in a Stackelberg model. The CSD sets its prices first, the custodian bank follows. There are many investor banks each of which has to decide whether to use the service of the CSD or of the custodian bank. This decision depends on the prices and the investor bank's preferences for the inhomogeneous services of the two service providers. Since the custodian bank uses services provided by the CSD as input, the CSD can raise its rival's costs. However, due to network externalities, the CSD's equilibrium market share is not necessarily higher than socially optimal. This result has important policy implications that are related to a discussion currently taking place in the securities settlement industry.

Keywords: Securities settlement, network competition, raising rival's cost

JEL Classification: G10, G20, L14

Suggested Citation

Holthausen, Cornelia and Tapking, Jens, Raising Rival's Costs in the Securities Settlement Industry (July 2004). Available at SSRN: https://ssrn.com/abstract=557702 or http://dx.doi.org/10.2139/ssrn.557702

Cornelia Holthausen (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6490 (Phone)
+49 69 1344 855 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Jens Tapking

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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