Platform Investment and price parity clauses*

Abstract

Platforms use price parity clauses to prevent sellers setting lower prices when selling through other channels. They claim these restraints are needed so platforms have incentives to invest in providing search services—without them, consumers would search on the platform but then switch to buy in a cheaper channel. In a model incorporating these effects, we find that wide price parity clauses lead to excessive platform investment while narrow (or no) price parity clauses lead to insufficient platform investment. Taking these investment effects into account, wide price parity clauses lower consumer surplus but have ambiguous effects on total welfare.