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Ad-valorem platform fees and efficient price discrimination

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  • Zhu Wang
  • Julian Wright

Abstract

This 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.

Suggested Citation

  • Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:12-08
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    References listed on IDEAS

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    6. Simon Loertscher & Andras Niedermayer, 2008. "Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses," Discussion Papers 1472, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    7. John Vickers & Simon Cowan, 2007. "Output and Welfare Effects in the Classic Monopoly Price Discrimination Problem," Economics Series Working Papers 355, University of Oxford, Department of Economics.
    8. Jean-Charles Rochet & Jean Tirole, 2003. "Platform Competition in Two-Sided Markets," Journal of the European Economic Association, MIT Press, vol. 1(4), pages 990-1029, June.
    9. Gans Joshua S & King Stephen P, 2003. "The Neutrality of Interchange Fees in Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 3(1), pages 1-18, January.
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    Cited by:

    1. Sebastian Wismer, 2013. "Intermediated vs. Direct Sales and a No-Discrimination Rule," Working Papers 131, Bavarian Graduate Program in Economics (BGPE).

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    Keywords

    Financial markets; Payment systems;

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