DP1539 Competition between Intermediated and Direct Trade and the Timing of Disintermediation

Author(s): John Fingleton
Publication Date: December 1996
Keyword(s): Disintermediation, Intermediation, Middleman
JEL(s): 012, C78, D49
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=1539

This paper analyses competition between direct and intermediated trade. We show that middlemen’s supply and demand depend on both their bid and ask prices if sellers and buyers have the alternative of trading directly. Multiplicity also prevails. Direct trade does not constrain the market power of middlemen unless it is frictionless. Our results suggest that the timing of disintermediation is likely to be sub-optimal and have implications, more generally, for the analysis of many financial and food markets, where parallel or alternative trade channels for the same good exist.