Regulating Platform Fees Under Price Parity

Online market places, such as Amazon's, or online travel agencies, such as Booking.com, greatly expand consumer information about market offers, but also raise firms' marginal costs by charging high commissions (which in some cases reach25%). To prevent show-rooming, platforms adopted price parity clauses, which restrict sellers' ability to offer lower prices in alternative sales channels. Whether to uphold, reform, or ban price parity has been at the center of the policy debate, but so far little consensus has emerged. In the paper presented in this Virtual Market Design Seminar, the authors investigate a natural alternative to lifting price parity; namely, they study how to optimally cap platforms' commissions. The optimal cap reflects the Pigouvian precept according to which the platform should not charge fees greater than the externality that its presence generates on other market participants. Employing techniques from extreme-value theory, they are able to express the optimal cap in terms of observable quantities. In an application to online travel agencies, they find that current average feesare welfare increasing only if platforms at least double consumers' consideration sets (relative to alternative way of gathering information online). This suggests that, in some markets, regulation capping commissions should bind if optimally set.

The seminar series is jointly organized by ZEW, the University Paris 2 Panthéon-Assas, the Karlsruhe Institute of Technology (KIT), and the Universities of Bonn and Mannheim. Additional information on the Virtual MD Seminar Series.