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Should Platforms be Allowed to Charge Ad Valorem Fees?

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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.
    • Handle: RePEc:fip:fedrwp:17-05
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    References listed on IDEAS

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    Cited by:

    1. Yassine Lefouili & Leonardo Madio, 2022. "The economics of platform liability," European Journal of Law and Economics, Springer, vol. 53(3), pages 319-351, June.
    2. Doh-Shin Jeon & Yassine Lefouili & Leonardo Madio, 2021. "Platform Liability and Innovation," Working Papers 21-05, NET Institute.
    3. Tetsuya Shinkai & Naoshi Doi, 2023. "Price and quality decision of a monopoly platform for transaction with shipping," Discussion Paper Series 252-2, School of Economics, Kwansei Gakuin University, revised Jul 2023.
    4. Borys Grochulski & Zhu Wang, 2024. "Real Estate Commissions and Homebuying," Working Paper 24-01, Federal Reserve Bank of Richmond.
    5. Ding, Rong & Ko, Chiu Yu & Shen, Bo, 2022. "Partial compatibility in two-sided markets: Equilibrium and welfare analysis," Economic Modelling, Elsevier, vol. 116(C).
    6. Mark J. Tremblay, 2020. "The Limits of Marketplace Fee Discrimination," Working Papers 20-10, NET Institute.
    7. Sangita Poddar & Tanmoyee Banerjee (Chatterjee) & Swapnendu Banerjee, 2024. "A theoretical analysis on two‐sided duopoly platforms and tax regimes," International Journal of Economic Theory, The International Society for Economic Theory, vol. 20(1), pages 88-119, March.
    8. Yao Tang & Xu Guan, 2022. "Seller Organization and Percentage Fee Design in the Daily Deal Market," Information Systems Research, INFORMS, vol. 33(4), pages 1287-1302, December.
    9. Poddar, Sangita & Banerjee (Chatterjee), Tanmoyee, 2024. "Hybrid role of two-sided platform with one-sided congestion," Research in Economics, Elsevier, vol. 78(1), pages 83-98.

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    More about this item

    Keywords

    platforms; taxation; third-degree price discrimination;
    All these keywords.

    JEL classification:

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

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