Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/262097 
Year of Publication: 
2022
Series/Report no.: 
ECONtribute Discussion Paper No. 153
Publisher: 
University of Bonn and University of Cologne, Reinhard Selten Institute (RSI), Bonn and Cologne
Abstract: 
Since the push towards central clearing in derivatives markets after the global financial crisis, an open question has been how the development has affected competition. This paper models imperfect competition between dealers in derivatives markets. Two risk-neutral dealers offer derivatives to risk-averse clients with a hedging need, and compete in price (fee) and quality (default probability). I find that with such two-dimensional competition, for given default probabilities, an equilibrium in prices exists that is preferred by both dealers. In this equilibrium the dealer with the lower default probability makes larger profits - a feature, that can produce market discipline to keep the own default probability low. If a central counterparty (CCP) is introduced as an innovation that removes the quality dimension of the competition, this market force pushing for higher qualities vanishes.
Subjects: 
Derivatives
OTC Markets
Central Clearing
Imperfect Competition
Vertical Product Differentiation
JEL: 
G12
G23
G28
L13
L15
Document Type: 
Working Paper

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