Price coherence and adverse intermediation
By: Benjamin Edelman, Julian Wright
Contributors: Wright, Julian, author; Harvard Business School
Edition: Revised edition
Series: Working paper / Harvard Business School -- 14-052; Working paper (Harvard Business School) -- 14-052.
Publisher: Harvard Business School
Published: 2014
Place of publication: Boston]
Language: eng
Number of pages: 70
Description: 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.
Notes: "December 2013. (Revised March 2014.)"--Publisher's Web site.

Includes bibliographical references (pages 58-62).