ADVANTAGES TO COMPETING WITH YOURSELF - WHY AN EXCHANGE MIGHT DESIGN FUTURES CONTRACTS WITH CORRELATED PAYOFFS

This paper examines the form of futures contracts which a monopolistic exchange will offer to maximize transaction revenue when transaction fees are endogenously determined. We establish the desirable character istics of participants in contracts. For example, we show that contrac ts which appeal to hedgers on one side of the market and to speculator s on the other are desirable. In contrast to earlier work, we show tha t the sequentially selected set of contracts may not be optimal. It ma y be desirable for the exchange to offer correlated contracts, or even to bundle several contracts together and sell the bundled contract at a fee lower than the fee charged for the set of contracts purchased s eparately. Journal of Economic Literature Classification Numbers: G13, G20. (C) 1995 by Academic Press, Inc.