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Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation

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  • Simon Loertscher & Andras Niedermayer

Abstract

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

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File URL: http://fbe.unimelb.edu.au/__data/assets/pdf_file/0011/784316/1162.pdf
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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1162.

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Length: 59 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:mlb:wpaper:1162

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Keywords: brokers; applied mechanism design; linear commission fees; optimal indirect;

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  1. Salanié, Bernard, 2011. "The Economics of Taxation," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262016346, December.
  2. Martin F. Hellwig, 2003. "Public-Good Provision with Many Participants," Review of Economic Studies, Wiley Blackwell, vol. 70(3), pages 589-614, 07.
  3. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
  4. Jullien, B. & Mariotti, T., 2006. "Auction and the informed seller problem," Games and Economic Behavior, Elsevier, vol. 56(2), pages 225-258, August.
  5. Simon Loertscher & Andras Niedermayer, 2012. "Assessing the Performance of Simple Contracts Empirically:The Case of Percentage Fees," Department of Economics - Working Papers Series 1163, The University of Melbourne.
  6. Chenghuan Sean Chu & Phillip Leslie & Alan Sorensen, 2011. "Bundle-Size Pricing as an Approximation to Mixed Bundling," American Economic Review, American Economic Association, vol. 101(1), pages 263-303, February.
  7. Isabelle Perrigne & Quang Vuong, 2011. "Nonparametric Identification of a Contract Model With Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 79(5), pages 1499-1539, 09.
  8. Francois Ortalo-Magne & Aviv Nevo & Igal Hendel, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," 2007 Meeting Papers 89, Society for Economic Dynamics.
  9. Hu, Audrey & Matthews, Steven A. & Zou, Liang, 2010. "Risk aversion and optimal reserve prices in first- and second-price auctions," Journal of Economic Theory, Elsevier, vol. 145(3), pages 1188-1202, May.
  10. Leininger, W. & Linhart, P. B. & Radner, R., 1989. "Equilibria of the sealed-bid mechanism for bargaining with incomplete information," Journal of Economic Theory, Elsevier, vol. 48(1), pages 63-106, June.
  11. Mark Satterthwaite & Artyom Shneyerov, 2007. "Dynamic Matching, Two-Sided Incomplete Information, and Participation Costs: Existence and Convergence to Perfect Competition," Econometrica, Econometric Society, vol. 75(1), pages 155-200, 01.
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