On the Incidence of Commissions in Auction Markets

We analyze the welfare consequences of an increase in the commissions charged by inter- mediaries in auction markets. Commissions are similar to taxes imposed on buyers and sellers, and standard economics suggests that both sellers and buyers are made worse off by the tax. However, we show that when the buyers’ participation constraint binds and when sellers set optimal reservation prices, the level of commissions correlates participation and reservation prices in such a way that participating buyers strictly gain from higher commissions.

This paper supersedes CERP DP 4876, 2005 version as well as the 2009 version.