Double Auctions and Transaction Costs

Simon Jantschgi, Heinrich H.Nax, Bary Pradelski and Marek Pycia

No 17039, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Transaction costs are ubiquitous in markets. We show that they can fundamentally alter incentives and welfare. We categorize transaction costs into two types. Uniform transaction costs—such as fixed and price fees—incur unavoidable dead-weight loss but preserve key asymptotic properties of markets without transaction cost. Discriminatory transaction costs—such as spread fees—can avoid dead-weight loss but asymptotically lead to complex strategic behavior that may result in market failure. We show how optimal design depends on market size and traders’ beliefs: uniform fees are often optimal in large markets, while discriminatory fees may be preferable in small markets.

Date: 2022-05
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