Final answer:
A platform may earn more profit by setting β lower than the socially optimal level of β as it increases the transacted price and the platform's transaction fee. Perfect competition prevents firms from increasing prices due to their price-taker status, and price controls can reduce transaction volumes and social surplus.
Step-by-step explanation:
How does a platform earn more profit by setting β lower than the social optimal level of β (B*)? The correct answer is that it increases the transacted price and therefore the transaction fee collected by the platform, leading to an increase in profit.
In a market with price competition, a perfectly competitive firm is prevented from seeking higher profits by increasing the price it charges because such a firm is a price taker. If it were to set prices above the market level, it would not make any sales, as consumers would turn to the many other firms charging the market price.
Furthermore, when price ceilings or floors are set, they often result in a reduction in the number of transactions and consequently in social surplus. Understanding these concepts is essential for grasping how a platform may manipulate its profit margins by adjusting β.