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

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  • Loertscher, Simon
  • Niedermayer, Andras

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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  • Loertscher, Simon & Niedermayer, Andras, 2014. "Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation," Working Papers 14-03, University of Mannheim, Department of Economics.
    • Handle: RePEc:mnh:wpaper:35362
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    Cited by:

    1. Zhu Wang, 2018. "Why Do Platforms Use Ad Valorem Fees? Evaluating Two Alternative Explanations," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 153-171.
    2. Zhu Wang & Julian Wright, 2017. "Ad valorem platform fees, indirect taxes, and efficient price discrimination," RAND Journal of Economics, RAND Corporation, vol. 48(2), pages 467-484, May.
    3. Álvarez, Francisco & Rey, José-Manuel, 2019. "(Quasi) uniqueness and restoring dynamics of price-dispersion market equilibria under search cost," Journal of Mathematical Economics, Elsevier, vol. 81(C), pages 1-13.

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    More about this item

    Keywords

    brokers ; applied mechanism design ; linear commission fees ; optimal indirect mechanisms ; auction houses;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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