Ad-valorem platform fees and efficient price discrimination
AbstractThis paper investigates a puzzle and possible policy concern: Why do platforms such as eBay and Visa that enable the trade of goods of different unobserved costs and values rely predominantly on linear ad-valorem fees, that is, fees that increase in proportion to the sale price of the trades that they enable? Under a broad class of demand functions, we show that a linear ad-valorem fee schedule enables a platform to maximize its profit as if it could actually observe the costs and values of the goods traded and set a different optimal fee for each good. Surprisingly, we find for this class of demands, allowing the platform to set ad-valorem fees (i.e. price discriminate) increases social welfare, both when the platform is regulated to recover costs and when the platform is unregulated.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 12-08.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-12-15 (All new papers)
- NEP-COM-2012-12-15 (Industrial Competition)
- NEP-IND-2012-12-15 (Industrial Organization)
- NEP-MIC-2012-12-15 (Microeconomics)
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