Zhu Wang and Julian Wright
This paper explains why platforms such as Amazon and Visa rely predominantly on ad-valorem fees, fees which increase proportionally with transaction prices. It also provides a new explanation for why ad-valorem sales taxes are more desirable than specific taxes. The theory rests on the ability of ad-valorem fees (or taxes) to achieve efficient price discrimination in the face of transactions that differ widely in costs and values. We show how welfare can be higher due to the use of ad-valorem fees, including when we calibrate our model to data from Amazon and Visa.