Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation

58 Pages Posted: 7 Nov 2012

See all articles by Simon Loertscher

Simon Loertscher

University of Melbourne - Department of Economics

Andras F. Niedermayer

University of Mannheim - Department of Economics

Date Written: October 27, 2012

Abstract

Mechanisms according to which private intermediaries or governments charge transaction fees or indirect taxes are prevalent in practice. We consider a setup with multiple buyers and sellers and two-sided independent private information about valuations. We show that any weighted average of revenue and social welfare can be maximized through appropriately chosen transaction fees and that in increasingly thin markets such optimal fees converge to linear fees. Moreover, fees decrease with competition (or the weight on welfare) and the elasticity of supply but decrease with the elasticity of demand. Our theoretical predictions fit empirical observations in several industries with intermediaries.

Keywords: brokers, applied mechanism design, linear commission fees, optimal indirect mechanisms, auction houses

JEL Classification: C72, C78, L13

Suggested Citation

Loertscher, Simon and Niedermayer, Andras Ferenc, Fee-Setting Mechanisms: On Optimal Pricing by Intermediaries and Indirect Taxation (October 27, 2012). Available at SSRN: https://ssrn.com/abstract=2172386 or http://dx.doi.org/10.2139/ssrn.2172386

Simon Loertscher

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

Andras Ferenc Niedermayer (Contact Author)

University of Mannheim - Department of Economics ( email )

Mannheim 68131
Germany

HOME PAGE: http://andras.niedermayer.ch

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