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Advances in technology and several regulatory initiatives have led to the emergence of a competitive but fragmented equity trading landscape in the US and Europe. While these changes have brought about several benefits like reduced transaction costs, regulators and market participants have also raised concerns about the potential adverse effects associated with increased execution complexity and the impact on market quality of new types of venues like dark pools. In this article we review the theoretical and empirical literature examining the economic arguments and motivations underlying market fragmentation, as well as the resulting implications for investors' welfare. We start with the literature that views exchanges as natural monopolies due to presence of network externalities, and then examine studies which challenge this view by focusing on trader heterogeneity and other aspects of the microstructure of equity markets.
In Germany a public discussion on the "power of banks" has been going on for decades now with power having at least two meanings. On the one hand it is the power of banks to control public corporations through direct shareholdings or the exercise of proxy votes - this is the power of banks in corporate control. On the other hand it is market power - due to imperfect competition in markets for financial services - that banks exercise vis-à-vis their loan and deposit customers. In the past, bank regulation has often been blamed to undermine competition and the working of market forces in the financial industry for the sake of soundness and stability of financial services firms. This chapter tries to shed some light on the historical development and current state of bank regulation in Germany. In so doing it tries to embed the analysis of bank regulation into a more general industrial organisation framework. For every regulated industry, competition and regulation are deeply interrelated as most regulatory institutions - even if they do not explicitly address the competitiveness of the market - either affect market structure or conduct. This paper tries to uncover some of the specific relationships between monetary policy, government interference and bank regulation on the one hand and bank market structure and economic performance on the other. In so doing we hope to point to several areas for fruitful research in the future. While our focus is on Germany, some of the questions that we raise and some of our insights might also be applicable to banking systems elsewhere. Revised version forthcoming in "The German Financial System", edited by Jan P. Krahnen and Reinhard H. Schmidt, Oxford University Press.
In this paper we assess the implications of sunk costs and product differentiation on the pricing decisions of the multinational firms. For this purpose we use a modified version of Salop's spatial competition. The model yields clear-cut predictions regarding the effects of exchange rate shocks on the market structure and on pass-through. The main results are following: shocks within the band of inaction do not affect market structure. The upper bound of this range rises as the industry ratio of sunk- to fixed costs increases. As fixed costs and product heterogeneity jointly increase, the lower bound drops. Outside of the range, depreciations cause one or several of those foreign brands closest to the home brand to leave. This decreases the overall responsiveness of prices to exchange rate shocks. Large appreciations induce entry and increase the elasticity of prices. This asymmetry implies larger positive than negative PPP deviations. When accounting for price changes in foreign markets, strategic pricing behaviour is no longer sufficient to generate real exchange rate variability. Incomplete pass-through obtains if and only if the domestic firms have a smaller market share abroad. With large nominal exchange rate shocks a hysteresis result obtains if and only if sunk costs are non-zero. Klassifikation: C33, E31