Platform Investment and Price Parity Clauses
32 Pages Posted: 11 Oct 2016
Date Written: September 1, 2016
Platforms use price parity clauses to prevent sellers charging lower prices when selling through other channels. Platforms justify these restraints by noting they are needed to prevent free-riding, which would undermine their incentives to invest in their platform. In this paper, we study the effect of price parity clauses on three different types of platform investment, and evaluate these restraints taking into account these investment effects. We find, that wide price parity clauses lead to excessive platform investment while without such price parity clauses there is insufficient platform investment. Even taking these investment effects into account, wide price parity clauses always lower consumer surplus and often lowers total welfare.
Keywords: Search, Vertical Restraints, Intermediation
JEL Classification: D40, L11, L14, L42
Suggested Citation: Suggested Citation