Competition and Integration among Stock Exchanges in Europe: Network Effects, Implicit Mergers and Remote Access

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Abstract
The economic theory of network externalities and a simple game theoretical framework are used to explore the issue of competition among stock exchanges and the possibility of consolidation in the European stock-exchange industry, among the different exchanges. The main features of this paper are the following: the treatment of exchanges as firms; the application of network externalities to study competition among exchanges; the extension of network externalities, through implementing "cross-network" effects; the existence of equilibria where exchanges may decide, even unilaterally, to achieve full com-patibility through implicit mergers and remote access, "specializing" only in trading or listing services. One implication is that consolidation of European exchanges into one may occur with a welfare efficient outcome or with a lock-in to a Pareto-inferior equilibrium. This is due to the network externalities and the different starting points of the various exchanges. "Implicit mergers" among exchanges together with remote access are always weakly (in half of the cases, strictly) more efficient than the actual competition, provided that the fixed cost of compatibility are sufficiently low. This finding sheds light also on the existence and efficacy, especially in the USA, of automated trading systems, which can be seen as exchanges specialized in trading services.
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