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Working Papers

March 2017, No. 17-05R

Should Platforms be Allowed to Charge Ad Valorem Fees? (Revised July 2018)

Zhu Wang and Julian Wright

Many platforms that facilitate transactions between buyers and sellers charge ad valorem fees in which fees depend on the transaction price set by sellers. Given these platforms do not incur significant costs that vary with transaction prices, their use of ad valorem fees has been questioned. In this paper, using a model that connects ad valorem fees to third-degree price discrimination, we evaluate the welfare consequences of banning such fees. We find the use of ad valorem fees generally increases welfare, including for calibrated versions of the model based on data from Amazon's marketplace and Visa's signature debit cards.

Supplementary Appendix


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