Discussion paper

DP15048 Regulating Platform Fees under Price Parity

Online marketplaces, such as Amazon, or online travel agencies, such as Booking.com, greatly
expand consumer information about market offers, but also raise firms’ marginal costs by charging high commissions. To prevent show-rooming, platforms adopted price parity clauses, which restrict sellers’ ability to offer lower prices in alternative sales channels. Whether to uphold, reform, or ban price parity has been at the center of the policy debate, but so far little consensus
has emerged. In this paper, we investigate a natural alternative to lifting price parity; namely,
we study how to optimally cap platforms’ commissions. The optimal cap reflects the Pigouvian
precept according to which the platform should not charge fees greater than the externality that
its presence generates on other market participants. Employing techniques from extreme-value
theory, we are able to express the optimal cap in terms of observable quantities. In an application
to online travel agencies, we find that current average fees are welfare increasing only if platforms
at least double consumers’ consideration sets (relative to alternative ways of gathering information online).
This suggests that, in some markets, regulation capping commissions should bind if
optimally set.

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Citation

Gomes, R and A Mantovani (eds) (2020), “DP15048 Regulating Platform Fees under Price Parity”, CEPR Press Discussion Paper No. 15048. https://cepr.org/publications/dp15048