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

  • Simon Loertscher & Andras Niedermayer

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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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
Contact details of provider: Postal: Department of Economics, The University of Melbourne, 4th Floor, FBE Building, Level 4, 111 Barry Street. Victoria, 3010, Australia
Phone: +61 3 8344 5355
Fax: +61 3 8344 6899
Web page: http://www.economics.unimelb.edu.au
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  8. Chang-Tai Hsieh & Enrico Moretti, 2002. "Can Free Entry be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry," NBER Working Papers 9208, National Bureau of Economic Research, Inc.
  9. S. P. Anderson & A. de Palma & B. Kreider, 1999. "Tax incidence in differentiated product oligopoly," THEMA Working Papers 99-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
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  16. Loertscher, Simon & Niedermayer, Andras, 2012. "Assessing the Performance of Simple Contracts Empirically: The Case of Percentage Fees," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 435, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  17. Rutherford, R.C. & Springer, T.M. & Yavas, A., 2005. "Conflicts between principals and agents: evidence from residential brokerage," Journal of Financial Economics, Elsevier, vol. 76(3), pages 627-665, June.
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  23. Audrey Hu & Steven A. Matthews & Liang Zou, 2009. "Risk Aversion and Optimal Reserve Prices in First and Second-Price Auctions, Second Version," PIER Working Paper Archive 10-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 03 Jan 2010.
  24. Oz Shy & Zhu Wang, 2011. "Why Do Payment Card Networks Charge Proportional Fees?," American Economic Review, American Economic Association, vol. 101(4), pages 1575-90, June.
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