Price Coherence and Excessive Intermediation

73 Pages Posted: 24 Oct 2014 Last revised: 24 Jul 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 12, 2015

Abstract

First circulated as Price Coherence and Adverse Intermediation: http://ssrn.com/abstract= 2373671 in December 2013.

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 would want to restrict sellers from charging buyers more for transactions it intermediates. With this restriction an intermediary can profitably raise demand for its services by eliminating any extra price buyers face for purchasing through the intermediary. We show that this leads to inflated retail prices, excessive adoption of the intermediaries' services, over-investment in benefits to buyers, and a reduction in consumer surplus and sometimes welfare. Competition among intermediaries intensifies these problems by increasing the magnitude of their effects and broadening the circumstances in which they arise. We discuss applications to payment card systems, travel reservation systems, rebate services, and various other intermediaries.

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

JEL Classification: D40, L11

Suggested Citation

Edelman, Benjamin G. and Wright, Julian, Price Coherence and Excessive Intermediation (March 12, 2015). Quarterly Journal of Economics 130, no. 3 (August 2015): 1283-1328, Available at SSRN: https://ssrn.com/abstract=2513513 or http://dx.doi.org/10.2139/ssrn.2513513

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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