Asymmetric Information, Intermediation, Coordination, Rational Self-Selection and Social Welfare

Abstract

To understand the choice of an intermediary, let us focus on the organization ofexchange of products (goods and services) between sellers and buyers throughthe two extreme forms of intermediary exchanges, ignoring the other roles thatintermediaries often play. In one оf thе forms of intermediary exchanges, the intermediary acts as a dealer (retailer) in a sense that it buys products from sellersand resells them to buyers: pricing is centralized by the intermediary. In the second form of intermediary exchange, the intermediary does not take control of theseller’s products, but simply offers access to a platform (or marketplace) wherebuyers and sellers can interact as they see fit: pricing is decentralized to marketparticipants, and the platform- taxes trade. The first form corresponds to a business model in which the dealer sets the wholesale price for sellers and sets theretail price for buyers, and sellers and buyers are price-takers. The second formcorresponds to a business model in which the platform operator collects a platform usage charge from each seller and collects a platform usage fee from each buyer, and sellers set retail prices for buyers. Market intermediaries coordinatethe actions of buyers and sellers. Firms carry out transactions, servicing thepayment system, inventory control, and record keeping, which are important forthe functioning of markets. In addition, firms provide a central place of exchange, thus reducing the search costs for buyers and sellers. By comparing thecosts of intermediation with the costs of non-intermediated exchange in the markets, matching buyers and sellers, or the costs of search, it can be shown that anintermediated exchange happens to be more beneficial. Indirect network effectson both sides of the market lead to the concept of so called two-sided platforms.In such a platform, the primary role of intermediary is to control access to theplatform that at least two groups of economic agents use to their interaction. Asimilar platform should be valued more by users of each group when the platform is used more by another group. Individual decisions to join a particularplatform then generate indirect network effects on agents on the other side ofplatform. Due to the centralized operation of the platform, the intermediary canadd value and capture rents by facilitating the internalization of the externalitiesrelated with network effects. The characteristics of intermediaries must meetcertain expectations of market participants.