Should Platforms be Allowed to Charge Ad Valorem Fees?

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.JEL classification: D4, H2, L5

The Limits of Marketplace Fee Discrimination

“…Instead, we focus on the platform's problem within its own marketplace as though it were the only option for the products that it facilitates. While this approach is a simplification, it is the natural starting point for studying marketplace fee discrimination and it is consistent with the models ofWang and Wright (2017) andWang and Wright (2018).7 In principle, the amount of fee discrimination is chosen by the platform; however, the platform's motives behind extensive discrimination are unclear. Without any concern of merchant, consumer, or antitrust recourse, a platform would use as many categories as possible until the cost of an additional category outweighs the improvement to platform revenues.…”

“…Although they tackle a different problem, the models of Wang and Wright (2017) and Wang and Wright (2018) relate to ours in several respects. Both papers consider the platform's choice between an ad valorem or fixed fee in an exogenously given category that comprises different markets (e.g., which type of fee for the "furniture" category on Amazon or eBay).…”

“…However, the fixed fee is often less than a dollar in those cases. For more on affine fee schedules, consider Wang and Wright (2017) and Wang and Wright (2018).…”

Ad valorem platform fees, indirect taxes, and efficient price discrimination

“…First, one could use our setting to evaluate the welfare effects of banning ad valorem fees in an unregulated environment in which the platform remains free to set the level of its fixed per‐transaction fee. We explore this in Wang and Wright (). Second, it would be interesting to consider whether ad valorem taxes are justified from a Mirrlees‐Atkinson‐Stiglitz perspective, rather than the Ramsey perspective we took.…”

Is Ranking Advantage Equal to Market Power? —An Empirical Study of E-Commerce Platforms

“…(2) Existing empirical studies are mostly based on homogeneous or single-category commodities (Wenwei Ai, 2018;Yu Wang et al, 2019;Brynjolfsson and Smith (2000); Wang and Wright, 2018). This paper uses a large sample of microlevel data from three leading e-commerce platforms in China to expand research to heterogeneous and multicategory commodities.…”