JOINT ECON-S&P: Pricing Optimality in a Multi-Sided Market; Dr Michael Sullivan (Western University)

Abstract:

I identify and empirically assess distortions that lead oligopolistic platforms' profit-maximizing fees to diverge from socially efficient fees in the setting of the US food delivery industry. In addition to quantifying the market power, Spence, and displacement distortions introduced by Weyl (2010) and Tan and Wright (2021), I analyze distortions arising from the incomplete substitution of online and offline ordering and from inefficient platform adoption by merchants. To do so, I assemble a rich collection of datasets characterizing the food delivery industry and formulate a detailed model of the industry. The results suggest that 15% caps on restaurant commissions of the sort commonly enacted in the industry boost restaurant profit but reduce aggregate efficiency. Less stringent caps, though, tend to boost aggregate welfare by counteracting distortions that tend to bias platform fee structures against merchants. Classical market power is the largest friction; regulation of the overall fee level can achieve larger total welfare gains than regulation of the ratio of consumers' and merchants' fees.

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