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Should Platforms be Allowed to Charge Ad Valorem Fees?

Author

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  • Zhu Wang
  • Julian Wright

Abstract

Many platforms that facilitate transactions between buyers and sellers charge ad valorem fees in which fees depend on the transaction price set by sellers. Given these platforms do not incur significant costs that vary with transaction prices, their use of ad valorem fees has raised controversies about the efficiency of this practice. In this paper, using a model that connects platforms' use of ad valorem fees to third-degree price discrimination, we evaluate the welfare consequences of banning such fees. We find the use of ad valorem fees generally increases welfare, including for calibrated versions of the model based on data from Amazon's marketplace and Visa's signature debit cards.

Suggested Citation

  • Zhu Wang & Julian Wright, 2017. "Should Platforms be Allowed to Charge Ad Valorem Fees?," Working Paper 17-5, Federal Reserve Bank of Richmond, revised 22 Mar 2017.
  • Handle: RePEc:fip:fedrwp:17-05
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    More about this item

    Keywords

    platforms; third-degree price discrimination; taxation;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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