Vertical Integration, Competition, And Financial Exchanges: Is There Grain In The Silo?

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The authors investigate the incentives for vertical or horizontal integration in the financial security service industry, consisting of trading, clearing and settlement. They thereby focus on firms' decisions but also look on the implications of these decisions on competition and welfare. Their analysis shows that the incentives for vertical integration crucially depend on industry as well as market characteristics. A more pronounced demand for liquidity clearly favors vertical integration whereas deeper financial integration increases the incentives to undertake vertical integration only if the efficiency gains associated with vertical integration are sufficiently large.