Optional Intermediaries and Pricing Restraints

Abstract

When a platform is an optional intermediary, should it require price coherence, i.e., that sellers charge the same price to the platform’s users as they charge their direct customers? If the platform does this, how will it affect consumers’ and overall welfare? In a model leveraging insight from the study of third-degree price discrimination, we show that, when demand has flexible curvature, a markup-versus-volume tradeoff arises that governs the platform’s choice. When sellers’ profits are concave enough, the platform prefers to let them charge separate prices. However, when it does require price coherence, there is a drawing-in effect, geared towards low-valuation platform users, which can make this policy surprisingly appealing for consumers.

Keywords: Platforms, online intermediaries, price coherence, price discrimination

JEL Classification: D21, L11, L42