Working Paper | HBS Working Paper Series | 2014

Price Coherence and Adverse Intermediation

by Benjamin Edelman and Julian Wright

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, 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.

Keywords: intermediaries; platforms; Two-Sided Markets; price coherence; Price; Two-Sided Platforms; Distribution Channels;

Citation:

Edelman, Benjamin, and Julian Wright. "Price Coherence and Adverse Intermediation." Harvard Business School Working Paper, No. 14-052, December 2013. (Revised March 2014. Supplemental appendix.)