Abstract:
Products sold on online platforms often include additional fees and
features. Frequently, platforms deliberately shroud these fees from
consumers, e.g. by revealing them only late in the purchase process.
Examples are fees for shipping, service and handling, product-upgrade
fees like luggage fees on flight comparison websites, or resort fees
on hotel-booking platforms. We explore the incentives of a two-sided
platform to disclose (a.k.a. unshroud) additional fees when some
buyers naively ignore shrouded additional fees. We start with a model
where the platform can shroud fees of sellers on the platform, and
then extend the model to explore when the platform charges and shrouds
its own additional fees. In both cases the main mechanism is that the
platform shrouds or unshrouds additional fees to manipulate
cross-group network externalities between buyers and sellers. We
highlight two results suggesting that the increasing relevance of
online marketplaces might have lead to more shrouding of additional
fees and features. First, we find that platforms have stronger
incentives to shroud sellers’ fees than sellers themselves. Second,
fiercer competition between sellers on the platform attracts buyers,
encouraging the platform to charge and shroud its own additional fees.
Thus, relative to conventional marketplaces, platforms can have
stronger incentives to shroud fees exactly because they facilitate
comparison and encourage competition between sellers. Finally,
everything else equal, we find the platform has stronger incentives to
shroud seller fees than its own fees. We discuss policy implications,
a benchmark without naive buyers, a wide range of extensions and
applications, and connect our results to common practices like drip
pricing.
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