Markets with Price Coherence

Edelman, Benjamin, and Julian Wright. “Markets with Price Coherence.” Harvard Business School Working Paper, No. 15-061, January 2015. (Revised March 2015.) (Supplement to “Price Coherence and Excessive Intermediation.”)

In markets with price coherence, the purchase of a given good via an intermediary is constrained to occur at the same price as a purchase of that same good directly from the seller (or through another competing intermediary). We examine ten markets with price coherence, including their origin and outcomes as well as concerns and policy interventions.

Bitcoin: Economics, Technology, and Governance

B√∂hme, Rainer, Nicolas Christin, Benjamin Edelman, and Tyler Moore. “Bitcoin: Economics, Technology, and Governance.” Journal of Economic Perspectives 29, no. 2 (Spring 2015): 213-238.

Bitcoin is an online communication protocol that facilitates virtual currency including electronic payments. Since its inception in 2009 by an anonymous group of developers, Bitcoin has served tens of millions of transactions with total dollar value in the billions. Users have been drawn to Bitcoin for its decentralization, intentionally relying on no single server or set of servers to store transactions and also avoiding any single party that can ban certain participants or certain types of transactions. Bitcoin is of interest to economists in part for its potential to disrupt existing payment systems and perhaps monetary systems as well as for the wealth of data it provides about agents’ behavior and about the Bitcoin system itself. This article presents the platform’s design principles and properties for a non-technical audience; reviews its past, present, and future uses; and points out risks and regulatory issues as Bitcoin interacts with the conventional financial system and the real economy.

Risk, Information, and Incentives in Online Affiliate Marketing

Edelman, Benjamin, and Wesley Brandi. “Risk, Information, and Incentives in Online Affiliate Marketing.” Journal of Marketing Research (JMR) 52, no. 1 (February 2015): 1-12. (Lead Article.)

We examine online affiliate marketing programs in which merchants oversee thousands of affiliates they have never met. Some merchants hire outside specialists to set and enforce policies for affiliates, while other merchants ask their ordinary marketing staff to perform these functions. For clear violations of applicable rules, we find that outside specialists are most effective at excluding the responsible affiliates, which we interpret as a benefit of specialization. However, in-house staff are more successful at identifying and excluding affiliates whose practices are viewed as “borderline” (albeit still contrary to merchants’ interests), foregoing the efficiencies of specialization in favor of the better incentives of a company’s staff. We consider the implications for marketing of online affiliate programs and for online marketing more generally.

Social Comparisons and Deception Across Workplace Hierarchies: Field and Experimental Evidence

Edelman, Benjamin, and Ian Larkin. “Social Comparisons and Deception Across Workplace Hierarchies: Field and Experimental Evidence.” Organization Science 26, no. 1 (January-February 2015): 78-98.

We examine how unfavorable social comparisons differentially spur employees of varying hierarchical levels to engage in deception. Drawing on literatures in social psychology and workplace self-esteem, we theorize that negative comparisons with peers could cause either junior or senior employees to seek to improve reported relative performance measures via deception. In a first study, we use deceptive self-downloads on SSRN, the leading working paper repository in the social sciences, to show that employees higher in a hierarchy are more likely to engage in deception, particularly when the employee has enjoyed a high level of past success. In a second study, we confirm this finding in two scenario-based experiments. Our results suggest that longer-tenured and more successful employees face a greater loss of self-esteem from negative social comparisons and are more likely to engage in deception in response to reported performance that is lower than that of peers.

Price Restrictions in Multi-sided Platforms: Practices and Responses

Edelman, Benjamin, and Julian Wright. “Price Restrictions in Multi-sided Platforms: Practices and Responses.” Competition Policy International 10, no. 2 (Fall 2014).

In connecting buyers to sellers, some two-sided platforms require that sellers offer their lowest prices through the platform, disallowing lower prices for direct sales or sales through competing platforms. In this article, we explore the various contexts where such restrictions have arisen, then consider effects on competition, entry, and efficiency. Where there are plausible mitigating factors, such as efficiencies from platforms’ price restrictions, we explore those rationales and compare them to the harms. We identify a set of responses for competition policy, look at experiences to date, and suggest some future attempts to improve the functioning of these markets.

Convergence of Position Auctions under Myopic Best-Response Dynamics

Cary, Matthew, Aparna Das, Benjamin Edelman, Ioannis Giotis, Kurtis Heimerl, Anna Karlin, Scott Duke Kominers, Claire Mathieu, and Michael Schwarz. “Convergence of Position Auctions under Myopic Best-Response Dynamics.” ACM Transactions on Economics and Computation 2, no. 3 (July 2014): 1-20.

We study the dynamics of multi-round position auctions, considering both the case of exogenous click-through rates and the case in which click-through rates are determined by an endogenous consumer search process. In both contexts, we demonstrate that the dynamic auctions converge to their associated static, envy-free equilibria. Furthermore, convergence is efficient, and the entry of low-quality advertisers does not slow convergence. Because our approach predominantly relies on assumptions common in the sponsored search literature, our results suggest that dynamic position auctions converge more generally.

Digital Discrimination: The Case of Airbnb.com

Edelman, Benjamin, and Michael Luca. “Digital Discrimination: The Case of Airbnb.com.” Harvard Business School Working Paper, No. 14-054, January 2014.

Online marketplaces often contain information not only about products, but also about the people selling the products. In an effort to facilitate trust, many platforms encourage sellers to provide personal profiles and even to post pictures of themselves. However, these features may also facilitate discrimination based on sellers’ race, gender, age, or other aspects of appearance. In this paper, we test for racial discrimination against landlords in the online rental marketplace Airbnb.com. Using a new data set combining pictures of all New York City landlords on Airbnb with their rental prices and information about quality of the rentals, we show that non-black hosts charge approximately 12% more than black hosts for the equivalent rental. These effects are robust when controlling for all information visible in the Airbnb marketplace. These findings highlight the prevalence of discrimination in online marketplaces, suggesting an important unintended consequence of a seemingly-routine mechanism for building trust.

Price Coherence: Impact and Incentives with Julian Wright

In modern markets, buyers can often buy the same good or service directly from a seller, and through one or more intermediaries, all at the same exact price. How should buyers behave in these markets? The natural strategy is to choose whichever intermediary offers the greatest benefit — perhaps a rebate, some loyalty points, or superior service. One intermediary might charge sellers far higher fees than another. But to buyers, these fees are irrelevant since they are paid entirely by sellers. It’s a classic I-choose-you-pay situation, and buyers predictably head for high-benefit intermediaries. The resulting outcomes can be both distortionary and welfare-reducing. For example, seeing an airline’s flights available both directly on the airline’s web site and via an online travel agent (like Expedia or Orbitz) (“OTA”), a buyer has every reason to choose the latter — avoiding retyping name, address, and payment details that the OTA already has on file. Convenient as an OTA may be, few users would willingly pay the ~$3 per segment (~$12 for a standard US domestic connecting round-trip) that OTAs charge to airlines. So too for credit cards: Their rebates and points are valuable, but most consumers would prefer a ~3% discount (the fee the seller pays to the card network).

Last week Julian Wright and I posted Price Coherence and Adverse Intermediation, analyzing incentives and outcomes in affected markets. We find that price coherence reduces consumer surplus and welfare due to inflated retail prices, over-investment in providing benefits to buyers, and excessive usage of intermediaries’ services. Notably, competition among intermediaries does not fix these problems: Indeed, competition among intermediaries intensifies the problems by increasing the magnitude of the effects and broadening the circumstances in which they arise.

Our analysis is grounded in eight diverse markets: insurance brokers and financial advisors, marketplaces, cashback/rebate services, search engine advertising, real estate buyers’ agents, restaurant ordering, and restaurant reservations, plus travel booking and credit cards as discussed above. In each instance, a law, norm, intermediary policy, or similar rigidity prevents sellers from passing an intermediary’s fees to the specific buyers who choose to use that intermediary. They’re complex markets, some quite large, and each worth a look. Their key similarity: In each instance, if a buyer foregoes the corresponding intermediary, the buyer still pays a share of intermediaries’ charges for others. If a buyer places a benefit on the intermediary’s service, perhaps still far less than what the intermediary charges the seller, the buyer might as well sign up.

It may seem counterintuitive that a series of voluntary transactions leaves all parties worse off. After all, no one would willingly enter a single transaction that makes him worse off. But the interlocking relationships truly can have that effect. Returning to the airline example: Consumers use OTAs because they anticipate, correctly, that substantially all airlines are in OTAs and because consumers know that prices are equal whether buying from an OTA versus directly from an airline. With many users shopping at OTA web sites, airlines then feel compelled to offer their flights via OTAs. In general, an individual airline would not want to withhold its flights from OTAs — it would lose too many sales. And an individual consumer has no reason to book directly — no cash savings from forgoing the OTA-provided benefits. On net, both buyer and seller end up using the intermediary even when they were perfectly capable of finding each other directly and even when the intermediary’s fees exceed the value the intermediary actually provides.

Our draft:

Price Coherence and Excessive Intermediation (last updated March 2015)

(update: published as “Price Coherence and Excessive Intermediation.” Quarterly Journal of Economics 130, no. 3 (August 2015): 1283-1328.)

Competing Ad Auctions

Ashlagi, Itai, Benjamin Edelman, and Hoan Soo Lee. “Competing Ad Auctions.” Harvard Business School Working Paper, No. 10-055, January 2010. (Revised May 2010, February 2011, September 2013.)

We present a two-stage model of competing ad auctions. Search engines attract users via Cournot-style competition. Meanwhile, each advertiser must pay a participation cost to use each ad platform, and advertiser entry strategies are derived using symmetric Bayes-Nash equilibrium that lead to the VCG outcome of the ad auctions. Consistent with our model of participation costs, we find empirical evidence that multi-homing advertisers are larger than single-homing advertisers. We then link our model to search engine market conditions: We derive comparative statics on consumer choice parameters, presenting relationships between market share, quality, and user welfare. We also analyze the prospect of joining auctions to mitigate participation costs, and we characterize when such joins do and do not increase welfare.

Earnings and Ratings at Google Answers

Edelman, Benjamin. “Earnings and Ratings at Google Answers.” Economic Inquiry 50, no. 2 (April 2012): 309-320. (draft as first circulated in 2004.)

I analyze all questions and answers from the inception of the Google Answers service through November 2003, and I find notable trends in answerer behavior: more experienced answerers provide answers with the characteristics askers most value, receiving higher ratings as a result. Answerer earnings increase in experience, consistent with learning on the job. Answerers who focus on particular question categories provide answers of higher quality but earn lower pay per hour (perhaps reflecting a lack of versatility). Answers provided during the business day receive higher payments per hour (a compensating differential for working when outside options are most attractive), but more experienced answerers tend to forego these opportunities.