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Markets and transaction costs


Jantschgi, Simon; Nax, Heinrich H; Pradelski, Bary S R; Pycia, Marek (2022). Markets and transaction costs. Working paper series / Department of Economics 405, University of Zurich.

Abstract

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.

Abstract

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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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C72, D44, D47, D81, D82
Uncontrolled Keywords:Transaction costs, markets, demand and supply, incentives, efficiency, robustness
Scope:Discipline-based scholarship (basic research)
Language:English
Date:September 2022
Deposited On:25 Feb 2022 09:05
Last Modified:06 Mar 2024 14:37
Series Name:Working paper series / Department of Economics
Number of Pages:67
ISSN:1664-7041
Additional Information:Revised version ; Former title: Fees, incentives, and efficiency in large double auctions
OA Status:Green
Other Identification Number:merlin-id:22225
  • Content: Published Version
  • Permission: Download for registered users
  • Description: Version February 2022
  • Content: Updated Version
  • Description: Revised version September 2022