Discussion paper

DP17619 Market Structure of Intermediation

Finding good products often requires costly screening effort. A skilled intermediary can represent many consumers, generating economies of scale in effort costs. However, consumers still need to find skilled intermediaries, re-creating the original screening friction. I provide a model of intermediary market structure, focusing on the length of the intermediation chain, the sector size, skill distribution, and effort choice in each layer. Even when the intermediary sector is less skilled than consumers and has lower quality than the product market, efficient intermediation can occur. Furthermore, when intermediaries privately know their skill types, a short (two-layer) chain allows different types to self-select into different layers, approximating the first-best outcome: consumers receive good products with negligible screening costs. Finally, when skill types are unknown, thereby rendering intermediaries' self-selection ineffective, a long chain can restore first-best efficiency. These results shed light on the structure of social media influencers and the asset management industry.

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Citation

Zhong, H (2022), “DP17619 Market Structure of Intermediation”, CEPR Press Discussion Paper No. 17619. https://cepr.org/publications/dp17619