Munich Personal RePEc Archive

Capping Commissions in the Presence of Price Competition

Schuler, Sebastian (2020): Capping Commissions in the Presence of Price Competition.

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Abstract

This paper analyzes the welfare impact of a cap on commissions paid by product providers to intermediaries who advise consumers. In contrast to the extant literature, with a downward sloping demand capped commissions have a direct impact on product providers' margins and consumers' prices. I show that a general ban is not welfare optimal as higher commissions do not necessarily lead to higher consumer prices. Starting from a general ban, allowing (marginally) higher commissions leads to lower prices as positive commissions make intermediaries wary to recommend more expensive products to consumers, thus making demand more elastic with respect to price.

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