Published:
12/19/2003
Attachments:
Working Paper 03-5
Author(s): Michelle A. Danis, Financial Economist
Abstract: This paper examines the relationship between exchange entry and competition in equity option markets. Exchanges compete in thousands of distinct markets, and the entry pattern in each market gives valuable information about profitability. By using a strategic framework, it is assumed that exchanges make interrelated entry decisions. In equilibrium, profits depend on the number of exchanges and in turn the number of exchanges depends on the profit available in a market. This is translated into a discrete choice model of exchange entry behavior.