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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Markets and transaction costs
Organization Unit
  • Simon Jantschgi
  • Heinrich H Nax
  • Bary S R Pradelski
  • Marek Pycia
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 405
ISSN 1664-7041
Number of Pages 67
Date 2022
Abstract Text Transaction costs are omnipresent in markets yet are often omitted in economic models. We show that their presence can fundamentally alter incentives and welfare in markets in which the price equates supply and demand. We categorize transaction costs into two types. Asymptotically uninfluenceable transaction costs—such as fixed and price fees—preserve the key asymptotic properties of markets without transaction costs, namely strategyproofness, efficiency, and robustness to misspecified beliefs and to aggregate uncertainty. In contrast, influenceable transaction costs—such as spread fees—lead to complex strategic behavior (which we call price guessing) and may result in severe market failure. In our analysis of optimal design we focus on transaction costs that are fees collected by a platform as revenue. We show how optimal design depends on the traders’ beliefs. In particular, with common prior beliefs, any asymptotically uninfluenceable fee schedule can be scaled to be optimal, while purely influenceable fee schedules lead to zero revenue. Our insights extend beyond markets equalizing demand and supply.
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Keywords Transaction costs, markets, demand and supply, incentives, efficiency, robustness
Additional Information Revised version ; Former title: Fees, incentives, and efficiency in large double auctions