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Why Do Platforms Charge Proportional Fees? Commitment and Seller Participation

Author

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  • Johannes Muthers
  • Sebastian Wismer

Abstract

If an intermediary offers sellers a platform to reach consumers, he may face the following hold-up problem: sellers suspect the intermediary will enter their respective product market as a merchant after they have sunk fixed costs of entry. Therefore, fearing that their investments cannot be recouped, less sellers join the platform. Hence, committing to not becoming active in sellers' markets can be profittable for the intermediary. We discuss different platform tariff systems to analyze this hold-up problem. We find that proportional fees (which are observed in many relevant real-world examples) mitigate the problem, unlike classical two-part tariffs (which most of the literature on two-sided markets examines). Thus, we offer a novel explanation for the use of proportional platform fees.

Suggested Citation

  • Johannes Muthers & Sebastian Wismer, 2012. "Why Do Platforms Charge Proportional Fees? Commitment and Seller Participation," Working Papers 115, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:115_mutherswismer
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    File URL: http://www.bgpe.de/texte/DP/115_MuthersWismer.pdf
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    References listed on IDEAS

    as
    1. Morton I. Kamien & Yair Tauman, 1986. "Fees Versus Royalties and the Private Value of a Patent," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 471-491.
    2. Jean‐Charles Rochet & Jean Tirole, 2006. "Two‐sided markets: a progress report," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 645-667, September.
    3. Wang, X. Henry, 1998. "Fee versus royalty licensing in a Cournot duopoly model," Economics Letters, Elsevier, vol. 60(1), pages 55-62, July.
    4. Andrei Hagiu, 2009. "Two-Sided Platforms: Product Variety and Pricing Structures," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 18(4), pages 1011-1043, December.
    5. repec:rje:randje:v:37:y:2006:3:p:720-737 is not listed on IDEAS
    6. Hagiu Andrei, 2007. "Merchant or Two-Sided Platform?," Review of Network Economics, De Gruyter, vol. 6(2), pages 1-19, June.
    7. Miao Chun-Hui, 2014. "Do Card Users Benefit From the Use of Proportional Fees?," Review of Network Economics, De Gruyter, vol. 12(3), pages 323-341, January.
    8. Oz Shy & Zhu Wang, 2011. "Why Do Payment Card Networks Charge Proportional Fees?," American Economic Review, American Economic Association, vol. 101(4), pages 1575-1590, June.
    9. Sen, Debapriya, 2005. "Fee versus royalty reconsidered," Games and Economic Behavior, Elsevier, vol. 53(1), pages 141-147, October.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
    2. repec:bla:randje:v:48:y:2017:i:2:p:467-484 is not listed on IDEAS
    3. Niedermayer Andras, 2015. "Does a Platform Monopolist Want Competition?," Review of Network Economics, De Gruyter, vol. 14(1), pages 1-44, March.
    4. Wismer, Sebastian, 2013. "Intermediated vs. Direct Sales and a No-Discrimination Rule," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79999, Verein für Socialpolitik / German Economic Association.
    5. Niedermayer, Andreas, 2015. "Does a Platform Monopolist Want Competition?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 523, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

    More about this item

    Keywords

    Intermediation; Platform Tariff; Hold-Up Problem;

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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