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Economic Quarterly

Jan. 9, 2019

Richmond Fed’s Economic Quarterly Asks Why Payment Platforms Use Ad Valorem Fees

In the latest issue of Economic Quarterly, Richmond Fed economist Zhu Wang reviews two explanations for why transaction platforms (such as online marketplaces and payment platforms) use ad valorem fees, which are fees charged to the seller in proportion to the value of a transaction.

One theory examined in Wang’s article is that when platforms and sellers both have market power, the platform receives more profit from using a proportional fee rather than a per-transaction fee. The second theory focuses on the idea that since platforms deal with a wide range of transactions of varying values, ad valorem fees are the most efficient way to increase their profit. He finds that the two theories complement each other in explaining the use of ad valorem fees.

This examination is important because of policy concerns about the use of ad valorem fees. Wang presents evidence that banning these fees may reduce social welfare, so any policy intervention should be approached with caution.

This article and others in the latest issue of Economic Quarterly are available on our website.

Also in this issue:

The Economic Quarterly is a free publication containing economic analysis pertinent to Federal Reserve monetary and banking policy. More information is available at (800) 322-0565 or online.

As part of our nation’s central bank, the Richmond Fed is one of 12 regional Reserve Banks working together with the Board of Governors to support a healthy economy and deliver on our mission to foster economic stability and strength. We connect with community and business leaders across the Fifth Federal Reserve District — including the Carolinas, District of Columbia, Maryland, Virginia, and most of West Virginia — to monitor economic conditions, address issues facing our communities, and share this information with monetary and financial policymakers. We also work with banks to ensure they are operating safely and soundly, supply financial institutions with currency that’s fit for distribution, and provide a safe and efficient way to transfer funds through our nation’s payments system.


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