Buyers, Sellers and Middlemen: Variations on Search-Theoretic Themes
We study bilateral exchange, both direct trade and indirect trade that happens through chains of intermediaries or middlemen. We develop a model of this activity and present applications. This illustrates how, and how many, intermediaries get involved, and how the terms of trade are determined. We show how bargaining with one intermediary depends on upcoming negotiations with downstream intermediaries, leading to holdup problems. We discuss the roles of buyers and sellers in bilateral exchanges, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. In addition to contrasting our framework with other models of middlemen, we discuss the connection to different branches of search theory. We also illustrate how bubbles can emerge in intermediation.
Wright tanks the NSF and the Ray Zemon Chair in Liquid Assets at UW for support. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.