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Economic Quarterly

Fourth Quarter 2018

Why Do Platforms Use Ad Valorem Fees? Evaluating Two Alternative Explanations

Zhu Wang

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.

DOI: https://doi.org/10.21144/eq1040401

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