Intermediated Surge Pricing

I study a market in which a profit-maximizing intermediary facilitates trade between buyers and sellers. The intermediary sets prices for buyers and sellers, and keeps the difference as her fee. Optimal prices increase when demand increases, i.e., shifts right. If a demand increase is due to an increase in the number of ex ante similar buyers, then the intermediary’s optimal percent fee decreases. If, instead, a demand increase is due to a reduction in the elasticity of demand, then the intermediary’s optimal percent fee increases. In either case, if the intermediary keeps a constant percent fee regardless of shifts in demand, as is the case for some intermediaries, then surge pricing (i.e., the ratio of price during high demand to price during low demand) is amplified on one side of the market and diminished on the other side. ∗I am grateful to Keith Chen, Sanjeev Goyal, Mamero Kaneko, Vijay Krishna, Margaret Meyer, Barry Nalebuff, Joe Ostroy, Asher Wolinsky and seminar audiences at Cambridge, Oxford, Stonybrook University, and the University of Warwick for helpful comments. †UCLA Anderson School of Management ([email protected])