Middlemen*

Abstract

This article provides an equilibrium model of intermediation based on search theory. Intermediaries, like retailers, buy goods from producers and sell them to consumers. The number of intermediaries is endogenously determined by free entry. The size and composition of their inventories is also endogenous. Larger inventories make it more likely that a random customer will find something he likes, but are more costly to store. The distribution of prices is characterized. Conditions are given under which there are too many or too few intermediaries, and under which intermediaries are too big or too small, from an efficiency perspective.

Brokers’ contractual arrangements in the Manhattan residential rental market

“…However, empirical studies of intermediaries' contractual arrangements have been hampered because data availability is usually limited and because such agreements often display little variation within an industry. Further, in most papers, the intermediary holds inventory (Rubinstein and Wolinsky, 1987;Yavas, 1992;Johri and Leach, 2002;Shevchenko, 2004;and Shi and Siow, 2011). Instead, we focus on contractual arrangements between asset owners and intermediaries in a market in which intermediaries' main role is to match buyers and sellers.…”

Information externalities and intermediaries in frictional search markets

“…The two mostly closely related papers are Johri and Leach (2002) and Shevchenko (2004). In settings similar to ours with heterogeneous goods and tastes, Johri and Leach (2002) and Shevchenko (2004) assume middlemen have no inherent advantage in search technology and explore how middlemen, who can hold more than one unit of inventory, can generate welfare gains over unintermediated search.…”

“…He derives both the optimal level of inventory and the equilibrium price distribution of goods. In Shevchenko (2004) and our model, the buyers' preferences are binary: a good is either acceptable or not, while Johri and Leach (2002) allows for more general preferences: a good is always acceptable to a buyer at certain price.…”

“…In settings similar to ours with heterogeneous goods and tastes, Johri and Leach (2002) and Shevchenko (2004) assume middlemen have no inherent advantage in search technology and explore how middlemen, who can hold more than one unit of inventory, can generate welfare gains over unintermediated search. In Johri and Leach (2002), there are many infinitely lived consumers and suppliers.…”

“…In Shevchenko (2004), each agent produces one type of goods, but desires to consume another so they search. If an agent randomly meets another agent, they trade only if there is a double coincidence.…”