Price Coherence and Adverse Intermediation

71 Pages Posted: 2 Jan 2014 Last revised: 9 Aug 2015

See all articles by Benjamin G. Edelman

Benjamin G. Edelman

Harvard University - HBS Negotiations, Organizations and Markets Unit

Julian Wright

National University of Singapore (NUS) - Department of Economics

Date Written: March 20, 2014

Abstract

Suppose an intermediary provides a benefit to buyers when they purchase from sellers using the intermediary's technology. We develop a model to show that the intermediary will want to restrict sellers from charging buyers more for transactions it intermediates. We show that this restriction can reduce consumer surplus and welfare, sometimes to such an extent that the existence of the intermediary can be harmful. Specifically, lower consumer surplus and welfare result from inflated retail prices, over-investment in providing benefits to buyers, and excessive adoption of the intermediaries' services. Competition among intermediaries intensifies these problems by increasing the magnitude of their effects and broadening the circumstances in which they arise. We show similar results arise when intermediaries provide matching benefits, namely recommendations of sellers to buy from. We discuss applications to travel reservation systems, payment card systems, marketplaces, rebate services, search engine advertising, and various types of brokers and agencies.

Keywords: intermediaries, platforms, two-sided markets, price coherence

JEL Classification: D40, L11

Suggested Citation

Edelman, Benjamin G. and Wright, Julian, Price Coherence and Adverse Intermediation (March 20, 2014). Harvard Business School NOM Unit Working Paper No. 14-052, Available at SSRN: https://ssrn.com/abstract=2373671 or http://dx.doi.org/10.2139/ssrn.2373671

Benjamin G. Edelman (Contact Author)

Harvard University - HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://people.hbs.edu/bedelman

Julian Wright

National University of Singapore (NUS) - Department of Economics ( email )

AS2 Level 6, 1 Arts Link
Singapore 117570
Singapore
6568743941 (Phone)
6567752646 (Fax)

HOME PAGE: http://profile.nus.edu.sg/fass/ecsjkdw/

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