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Electronic derivatives exchanges: Implicit mergers, network externalities, and standardization

Authors
Journal
The Quarterly Review of Economics and Finance
1062-9769
Publisher
Elsevier
Publication Date
Volume
35
Issue
2
Identifiers
DOI: 10.1016/1062-9769(95)90020-9
Disciplines
  • Economics

Abstract

Abstract The economic theory of network externalities is used to explore the possibility of consolidation and growing market power in the exchange-traded derivatives industry. A definition of implicit mergers between exchanges is offered. It is argued that electronic exchange structure will serve as the bund from which multinational mergers between existing exchanges will emerge. Economic equilibrium should entail lower pricing of electronic exchange services initially, followed by heightened liquidity and above marginal cost pricing later. The latter will be enabled through cartelization and implicit mergers. Evidence is provided that such merger activity has begun over the past year or so, with “international linkage” as the disguise and electronic trading facilities as the vehicle.

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