Economic Theory and Experimental Seminar - Andras Niedermayer (University Paris-Dauphine)

Room 315, Level 3, FBE Building, 111 Barry Street, Carlton

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Alex Nichifor

nichifor@unimelb.edu.au

T: +61 3 8344 7420

Title: An Optimal Pricing Theory of Transaction Fees in Thin Markets

Abstract: Transaction fees and taxes fare prominently in policy debates. We derive opti- mal transaction fees as the solution to a pricing problem faced by intermediaries and show that no mechanism performs better. We show that a higher elasticity of supply and a larger weight on the intermediary’s profits lead to higher fees. Coun- terintuitively, more elastic demand may increase fees. We show that extreme value theory implies asymptotic optimality of linear fees in thin markets. Our theoretical results fit empirical observations in several industries with intermediaries.