Markets and Transaction Costs

University of Zurich, Department of Economics, Working Paper No. 405

57 Pages Posted: 2 Apr 2022 Last revised: 27 Aug 2023

See all articles by Simon Jantschgi

Simon Jantschgi

University of Oxford - Department of Economics

Heinrich H. Nax

ETH Zürich; University of Zurich

Bary Pradelski

CNRS, Maison Francaise

Marek Pycia

University of Zurich

Date Written: February 11, 2022

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.

Keywords: Transaction Costs, Markets, Demand and Supply, Incentives, Efficiency, Robustness.

JEL Classification: C72, D44, D47, D81, D82

Suggested Citation

Jantschgi, Simon and Nax, Heinrich H. and Pradelski, Bary and Pycia, Marek, Markets and Transaction Costs (February 11, 2022). University of Zurich, Department of Economics, Working Paper No. 405, Available at SSRN: https://ssrn.com/abstract=4043576 or http://dx.doi.org/10.2139/ssrn.4043576

Simon Jantschgi (Contact Author)

University of Oxford - Department of Economics ( email )

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

Heinrich H. Nax

ETH Zürich ( email )

Rämistrasse 101
ZUE F7
Zürich, 8092
Switzerland

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

Bary Pradelski

CNRS, Maison Francaise ( email )

Marek Pycia

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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