Capping Commissions in the Presence of Price Competition

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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Advice; Cheap Talk;, Commissions; Regulation
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search ; Learning ; Information and Knowledge ; Communication ; Belief ; Unawareness; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality ; Standardization and Compatibility

References

Anagol, S., S. Cole, and S. Sarkar (2017). Understanding the advice of commissionsmotivated agents: Evidence from the indian life insurance market. Review of Economics and Statistics 99 (1), 1-15.

Armstrong, M. and J. Zhou (2011). Paying for prominence. The Economic Journal 121 (556), F368-F395.

Bar-Isaac, H., G. Caruana, and V. Cunnat (2012). Search, design, and market structure. American Economic Review 102 (2), 1140-60.

Bergstresser, D. and J. Beshears (2010). Who selected adjustable-rate mortgages? evidence from the 1989-2007 surveys of consumer finances.

Bergstresser, D., J. M. Chalmers, and P. Tufano (2008). Assessing the costs and benefits sof brokers in the mutual fund industry. The Review of Financial Studies 22 (10), 4129-4156.

Biglaiser, G. (1993). Middlemen as experts. The RAND journal of Economics, 212-223.

Bolton, P., X. Freixas, and J. Shapiro (2007). Conflicts of interest, information provision, and competition in the financial services industry. Journal of Financial Economics 85 (2), 297-330.

Cain, D. M., G. Loewenstein, and D. A. Moore (2005). The dirt on coming clean: Perverse effects of disclosing conflicts of interest. The Journal of Legal Studies 34 (1), 1-25.

Chater, N., S. Huck, and R. Inderst (2010). Consumer decision-making in retail investment services: A behavioural economics perspective. Report to the European Commission/SANCO.

Cummins, J. D. and N. A. Doherty (2006). The economics of insurance intermediaries. Journal of Risk and Insurance 73 (3), 359-396.

de Cornière, A. and G. Taylor (2019). A model of biased intermediation. The RAND Journal of Economics (forthcoming).

Ganuza, J.-J. and J. S. Penalva (2010). Signal orderings based on dispersion and the supply of private information in auctions. Econometrica 78 (3), 1007-1030.

Hagiu, A. and B. Jullien (2011). Why do intermediaries divert search? The RAND Journal of Economics 42 (2), 337-362.

Inderst, R. and M. Ottaviani (2009). Misselling through agents. American Economic Review 99 (3), 883-908.

Inderst, R. and M. Ottaviani (2012a). Competition through commissions and kickbacks. American Economic Review 102 (2), 780-809.

Inderst, R. and M. Ottaviani (2012b). Financial advice. Journal of Economic Literature 50 (2), 494-512.

Inderst, R. and M. Ottaviani (2012c). How (not) to pay for advice: A framework for consumer financial protection. Journal of Financial Economics 105 (2), 393-411.

Johnson, J. P. and D. P. Myatt (2006). On the simple economics of advertising, marketing, and product design. American Economic Review 96 (3), 756-784.

Lewis, T. R. and D. E. Sappington (1994). Supplying information to facilitate price discrimination. International Economic Review, 309-327.

Lizzeri, A. (1999). Information revelation and certification intermediaries. The RAND Journal of Economics, 214-231.

Malmendier, U. and D. Shanthikumar (2007). Are small investors naive about incentives? Journal of Financial Economics 85 (2), 457-489.

Malmendier, U. and D. Shanthikumar (2014). Do security analysts speak in two tongues? The Review of Financial Studies 27 (5), 1287-1322.

McAfee, R. P. and M. Schwartz (1994). Opportunism in multilateral vertical contracting: Nondiscrimination, exclusivity, and uniformity. The American Economic Review, 210-230.

Moscarini, G. and M. Ottaviani (2001). Price competition for an informed buyer. Journal of Economic Theory 101 (2), 457-493.

Mullainathan, S., M. Noeth, and A. Schoar (2012). The market for financial advice: An audit study. Technical report, National Bureau of Economic Research.

Murooka, T. (2014). Deception under competitive intermediation.

Shafrin, J. (2010). Operating on commission: analyzing how physician financial incentives affect surgery rates. Health economics 19 (5), 562-580.

Teh, T.-H. and J. Wright (2018). Steering by information intermediaries. Working Paper . Zhao, X. (2003). The role of brokers and financial advisors behind investments into load funds. Available at SSRN 438700 .