n many markets, sellers and buyers face a choice between trading with middlemen and attempting to trade directly with someone on the other side of the market. But direct trades – for example, via advertisements in buy-and-sell magazines – can be costly, especially if the ‘market’ – or reservation – prices are not known. It is not clear how the existence of direct trade possibilities affects the nature of competition among middlemen.

In Discussion Paper No. 1538, John Fingleton examines how the introduction of a direct trade alternative for buyers and sellers affects competition among middlemen. Direct trade makes the supply and demand functions performed by middlemen depend on both bid and ask prices, a feature Fingleton terms ‘interdependence’. A simple model is used to illustrate the phenomenon and to show how interdependence effects depend on the efficiency of direct trade. The conclusion is that direct trade does not alter Stahl’s (1988) finding that middlemen may ‘corner’ the market. If direct trade is without frictions (no delay or uncertainty costs etc.) then the interdependence effects will be strongest and the possibility of such monopolization of the intermediated trade will not exist. For all cases where there are some frictions in direct trade, however, a variant of Stahl’s result will prevail, and prices may be distorted, albeit by reduced magnitudes.

Competition among Middlemen when Buyers and Sellers can Trade Directly
John Fingleton