Why Do Platforms Use Ad Valorem Fees? Evaluating Two Alternative Explanations
Abstract: Platforms such as Amazon and Visa intermediate transactions between buyers and sellers. They typically charge ad valorem fees, in which fees depend on transaction values. Given that these platforms do not incur significant costs that vary with transaction value, their use of ad valorem fees poses a great puzzle. In this article, we review recent research on two alternative explanations: double marginalization versus price discrimination. With a generalized framework, we show that the two theories complement each other in explaining this pricing puzzle, and their relative importance is quantified in a calibration exercise.
File format is application/pdf
Description: Full text
Provider: Federal Reserve Bank of Richmond
Part of Series: Economic Quarterly
Publication Date: 2018