Ad-valorem platform fees and efficient price discrimination∗

Online shopping platforms (such as Amazon and eBay) or payment card networks (such as Visa and MasterCard) serve to facilitate transactions between buyers and sellers. While these platforms typically only incur small per-transaction costs, they often charge sellers a substantial proportional fee plus a small fixed transaction fee. In this paper, we investigate the implications of this use of ad-valorem fees (fees based on value) by a monopoly platform. The platform has to deal with trade in multiple goods with different costs and valuations that it does not observe. We characterize a class of platform demand functions that rationalizes the platform’s use of a linear fee schedule (a proportional fee plus fixed transaction fee). We show that allowing the platform to use ad-valorem fees is equivalent to it being allowed to use third-degree price discrimination in the hypothetical situation in which it observes the costs and valuations for each good traded and sets a different optimal fee for each. Surprisingly, we find for this class of demands, allowing the platform to set ad-valorem fees (i.e. price discriminate) generally increases social welfare. ∗We thank seminar and workshop participants from the Hong Kong University of Science and Technology and the National University of Singapore for helpful comments. †Research Department, Federal Reserve Bank of Richmond. E-mail: [email protected]. The views expressed are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Richmond or the Federal Reserve System. ‡Department of Economics. National University of Singapore: email [email protected].