Middlemen: The Visible Market Makers

Abstract

This paper presents a search-theoretic model where middlemen can emerge endogenously to intermediate between ex ante homogeneous buyers and sellers in the presence of coordination frictions. Middlemen set price to compete in the market, and hold an inventory to provide a high matching service. I show that middlemen's inventories can mitigate trade imbalances and interact with price competition, generating an interesting tradeoff for the equilibrium price determination.The competitive limit emerges when middlemen guarantee excess demand will never occur.Conditions are characterized under which middlemen carry out the short-side principle for the market price to be Walrasian. JEL Classification: D4, D5, D6, D8, G2, L1

The men in the middle: a missing dimension in global land deals

“…More nuanced analysis comes from studies set to determine the economic logic of middlemen. Are they distorting markets, taking advantage of information asymmetries (Rust and Hall 2003), or are they market-makers who play an important role in imperfect economic contexts (Watanabe 2006)? On the whole though, middlemen tend to be reviled in this literature, with many attempts to sideline them for the greater developmental good, e.g.…”

Directed Search and Firm Size*

“…In principle, it is possible to model a large firm as having more than two vacancies. Papers that have done so in a directed search setting include Watanabe (2004), Hawkins (2006), Geromichalos (2011), and Godenhielm and Kultti (2009), where firms can post more than k ≥ 2 vacancies or goods, and k is determined endogenously for the last three papers. If I were to allow large firms to have in general k vacancies in my model, I would need to specify how production changes if the firm is not operating with k workers, and, depending on how much loss of production or “penalty” the firm faces with hiring 1, 2, …, k − 1 workers, it could drive the large firm to pay either more or less than small firms.…”

Multi-player bargaining with endogenous capacity

“…We adopt subgame perfection as the equilibrium concept, moving backward in our analysis. First, we study bargaining equilibrium in the second stage of the game, given c. Then, we study the choice c. 6 [8] studies the emergence of dealers of differentiated goods as a function of cost of inventories, frictions, and negotiation leverage; [34] studies how intermediaries' choice of inventories impacts the frequency of random exchange, and so does [36] in a model with directed search markets.…”

“…The analysis of the limiting case of costless bargaining, instead, offers a rationale for assuming single-unit auctions, e.g., as in [2,17,20,32], when sellers face a short queue of customers who have substantial bargaining leverage. Finally, our framework can also find applicability in a literature devoted to study how intermediaries' choices of inventories help mitigate trading frictions in search and matching markets, as, for instance, in [8,34,36]. 6 We proceed as follows.…”