Abstract
The economic theory of network externalities and a simple‐game theoretical framework are used to explore the issue of competition among stock exchanges and the possibility of consolidation in the European stock‐exchange industry. The paper shows the existence of equilibria where exchanges may decide, even unilaterally, to achieve full compatibility through implicit mergers and remote access, specialising only in trading or listing services. Thus the consolidation of European exchanges into one may occur with a welfare‐efficient outcome or with a lock‐in to a Pareto‐inferior equilibrium, due to the network externalities and the different starting points of the various exchanges. ‘Implicit mergers’ among exchanges together with remote access are always weakly (in half of the cases, strictly) more efficient than the actual competition. This finding also sheds light on the existence and efficacy, of ATS and rating agencies, which can be viewed respectfully as exchanges specialising in trading and listing services.