Author Abstract
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, indeed 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, increasing the magnitude of their effects and also broadening the circumstances in which they arise. We discuss applications to travel reservation systems, payment card systems, marketplaces, rebate services, search engine advertising, and various types of brokers and agencies.
Paper Information
- Full Working Paper Text
- Working Paper Publication Date: December 2013
- HBS Working Paper Number: 14-052
- Faculty Unit(s): Negotiation, Organizations & Markets