Exchange Competition, Entry, and Welfare

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