Periodic Reporting for period 4 - PLATFORM (Competition and Regulation of Platform Markets)
Periodo di rendicontazione: 2022-11-01 al 2023-04-30
This ERC project investigated the economics of platform markets. To gain precision, I identified three research axes:
(i) The study of drip pricing and missed sales. Drip pricing is the practice, common among online retailers, of advertising a basic price at the beginning of the purchase process, following which additional fees, only avoidable at a cost to consumers, are then incrementally disclosed or "dripped." Under the threat of missing sales, firms may subsidize the consumption of ancillary goods, which is inefficient. I show that regulation banning loss-making sales is strictly welfare-increasing.
(ii) The study of intermediation fees and price coherence. While reducing search and transaction costs, many intermediaries are blamed for inflating prices through high intermediation fees and price coherence clauses, which prohibit firms from practicing lower prices on transactions not mediated by the platform. This project built a theory of price setting by intermediaries and derived the optimal commission cap, showing that it bounds the intermediaries' profit by the externality it imposes on other market participants.
(iii) The study of many-to-many matching under customized prices. Advances in information technology enabled matching intermediaries (e.g. advertising exchanges) to achieve high levels of targeting (making sure advertisers primarily reach the eyeballs of potential customers) and price customization (whereby prices are buyer-specific and are based on the entire consumption basket of a buyer). This project assessed how centralized matchmaking affects equilibrium outcomes and showed that prohibiting customized pricing typically increases welfare in advertising markets.
(i) The study of drip pricing and missed sales. Drip pricing is the practice, common among online retailers, of advertising a basic price at the beginning of the purchase process, following which additional fees, only avoidable at a cost to consumers, are then incrementally disclosed or "dripped." Under the threat of missing sales, firms may subsidize the consumption of ancillary goods, which is inefficient. I show that regulation banning loss-making sales is strictly welfare-increasing.
(ii) The study of intermediation fees and price coherence. While reducing search and transaction costs, many intermediaries are blamed for inflating prices through high intermediation fees and price coherence clauses, which prohibit firms from practicing lower prices on transactions not mediated by the platform. This project built a theory of price setting by intermediaries and derived the optimal commission cap, showing that it bounds the intermediaries' profit by the externality it imposes on other market participants.
(iii) The study of many-to-many matching under customized prices. Advances in information technology enabled matching intermediaries (e.g. advertising exchanges) to achieve high levels of targeting (making sure advertisers primarily reach the eyeballs of potential customers) and price customization (whereby prices are buyer-specific and are based on the entire consumption basket of a buyer). This project assessed how centralized matchmaking affects equilibrium outcomes and showed that prohibiting customized pricing typically increases welfare in advertising markets.
In the papers pertinent to axis (i), I started noting that firms often sell basic goods as well as ancillary ones. Hold-up concerns have led to ancillary good regulations such as transparency and price caps (for instance, regarding surcharges on payment cards). To evaluate these policies, I developed an imperfect-information framework for the analysis of platform and social regulation of card surcharging and cash discounting. I showed that cash discounts are generally welfare-enhancing but are unlikely to be adopted by firms. By contrast, card surcharging is often excessive. Optimal regulation calls for a cap on surcharges that is strictly smaller than the merchant’s convenience benefit.
The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (eg free shipping). I argued that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good’s cost so as not to miss sales on the basic good. Optimal regulation, be the upstream market (of the ancillary good) competitive or monopolistic, entails a ban on loss-making sales.
In the papers pertinent to axis (ii), I first observed that online intermediaries greatly expand consumer information, but also raise sellers’ marginal costs by charging high commissions. My analysis reveals that price parity provisions generate market power to the platform, so much so to decrease firms and consumers’ welfare. I then showed that commission cap regulation can remedy this distortion, and derived ready-to-use formulas for the cap.
Parallel to the discussion above, I also considered the regulation of digital wallets offered by Big Techs, which combine features of payment services and search platforms. Optimal regulation typically differs from the standard Tourist Test employed to cap the interchange fees of payment cards. Two new forces are present: On the one hand, the platform must be remunerated for the informational gains it generates. On the other hand, too much adoption generates merchant internalization, which is detrimental to welfare.
Finally, I investigated how interoperability (or the lack thereof) affects intermediation fees in mobile payments. I identified important barriers to interoperability (for instance, the zero-lower bound on prices where data externalities are present), discussing the pros and cons of mandated interoperability.
The papers pertinent to axis (iii) focus on two-sided markets; namely, those in which agents match through a platform, which designs and prices matching opportunities. We introduced a model of (platform-mediated) many-to-many matching in which agents’ preferences are both vertically and horizontally differentiated. We first showed that, perhaps counter-intuitively, customized pricing may either increase or decrease targeting. Secondly, we investigated the welfare effects of customized pricing, showing that mandating uniform pricing typically increases welfare in advertising markets.
The dissemination strategy of this project was mostly based on scientific publications and seminars at various academic institutions. I also presented some of the research outcomes in policy circles, such as Ofcom, the European Commission (DG Comp) and the Central Bank of Brazil.
The hold-up narrative, however, runs counter to evidence in many retail settings where ancillary good prices are set below cost (eg free shipping). I argued that the key to unifying these conflicting narratives is that the seller may absorb partly or fully the ancillary good’s cost so as not to miss sales on the basic good. Optimal regulation, be the upstream market (of the ancillary good) competitive or monopolistic, entails a ban on loss-making sales.
In the papers pertinent to axis (ii), I first observed that online intermediaries greatly expand consumer information, but also raise sellers’ marginal costs by charging high commissions. My analysis reveals that price parity provisions generate market power to the platform, so much so to decrease firms and consumers’ welfare. I then showed that commission cap regulation can remedy this distortion, and derived ready-to-use formulas for the cap.
Parallel to the discussion above, I also considered the regulation of digital wallets offered by Big Techs, which combine features of payment services and search platforms. Optimal regulation typically differs from the standard Tourist Test employed to cap the interchange fees of payment cards. Two new forces are present: On the one hand, the platform must be remunerated for the informational gains it generates. On the other hand, too much adoption generates merchant internalization, which is detrimental to welfare.
Finally, I investigated how interoperability (or the lack thereof) affects intermediation fees in mobile payments. I identified important barriers to interoperability (for instance, the zero-lower bound on prices where data externalities are present), discussing the pros and cons of mandated interoperability.
The papers pertinent to axis (iii) focus on two-sided markets; namely, those in which agents match through a platform, which designs and prices matching opportunities. We introduced a model of (platform-mediated) many-to-many matching in which agents’ preferences are both vertically and horizontally differentiated. We first showed that, perhaps counter-intuitively, customized pricing may either increase or decrease targeting. Secondly, we investigated the welfare effects of customized pricing, showing that mandating uniform pricing typically increases welfare in advertising markets.
The dissemination strategy of this project was mostly based on scientific publications and seminars at various academic institutions. I also presented some of the research outcomes in policy circles, such as Ofcom, the European Commission (DG Comp) and the Central Bank of Brazil.
The outcomes of this project advanced the start of the art in both scientific and policy circles.
Regarding research axis (i), most of the previous literature had ignored the possibility of missed sales when studying the pricing of add-ons. It showed that sellers may conceal the prices of add-ons as a way to extract more rents from consumers, working as a collusive device. By introducing missed sales, our work offers an explanation for the low (even negative) markups on the ancillary good practiced in many industries, generating markedly different regulatory prescriptions.
One important application of our framework comes from the payment industry. Notwithstanding regulatory efforts to incentivize price discrimination by merchants (for example, lifting the no-surcharge rule), merchants typically opt to implicitly subsidize consumer card usage by absorbing the fees. This phenomenon was elusive to previous literature. The optimal regulatory response to it (namely, a ban to loss-making sales) was first derived by this project.
Regarding research axis (ii), previously literature has emphasized the role that price parity clauses play as the source (or, at best, a reinforcer) of platforms’ market power, enabling them to levy high commissions. In line with these concerns, European competition authorities have reached important decisions banning price parity clauses over the past years. However, intermediation fees did not change noticeably in most markets where these clauses were prohibited. We were the first to investigate a natural and compelling alternative; namely, how to optimally cap platforms’ commissions.
Regarding research axis (iii), on price customization and targeting in matching markets, our main innovation was to offer a workhorse model to the study of matching with both horizontal and vertically differentiated preferences. Most previous literature assumes that preferences are only vertically differentiated, thus ignoring the issues of targeting and price customization that emerge when preferences are also horizontally differentiated. Importantly, the implications of uniform-price obligations in matching markets were also elusive to previous research.
Regarding research axis (i), most of the previous literature had ignored the possibility of missed sales when studying the pricing of add-ons. It showed that sellers may conceal the prices of add-ons as a way to extract more rents from consumers, working as a collusive device. By introducing missed sales, our work offers an explanation for the low (even negative) markups on the ancillary good practiced in many industries, generating markedly different regulatory prescriptions.
One important application of our framework comes from the payment industry. Notwithstanding regulatory efforts to incentivize price discrimination by merchants (for example, lifting the no-surcharge rule), merchants typically opt to implicitly subsidize consumer card usage by absorbing the fees. This phenomenon was elusive to previous literature. The optimal regulatory response to it (namely, a ban to loss-making sales) was first derived by this project.
Regarding research axis (ii), previously literature has emphasized the role that price parity clauses play as the source (or, at best, a reinforcer) of platforms’ market power, enabling them to levy high commissions. In line with these concerns, European competition authorities have reached important decisions banning price parity clauses over the past years. However, intermediation fees did not change noticeably in most markets where these clauses were prohibited. We were the first to investigate a natural and compelling alternative; namely, how to optimally cap platforms’ commissions.
Regarding research axis (iii), on price customization and targeting in matching markets, our main innovation was to offer a workhorse model to the study of matching with both horizontal and vertically differentiated preferences. Most previous literature assumes that preferences are only vertically differentiated, thus ignoring the issues of targeting and price customization that emerge when preferences are also horizontally differentiated. Importantly, the implications of uniform-price obligations in matching markets were also elusive to previous research.