Buyers, sellers and middlemen: variations in search theory

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. Bargaining with intermediaries depends on how they bargain with downstream intermediaries, leading to interesting holdup problems. We discuss the roles of buyers and sellers in bilateral exchange, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. We also illustrate how bubbles can emerge in the value of inventories.

CSM-385 Cooperation in Competitions - Constraint Propagation Strategies in Chain-bargaining

Electronic business motivates automatic bargaining: computers may not be as good bargainers as expert human bargainers, but by talking to a large number of traders on the Internet, they stand a better chance of getting good deals. While an end-seller may be interested in getting the highest profit from each negotiation, traders have to balance between making large profits in few deals (thus missing opportunities in the failed negotiations) and making smaller profits in larger number of deals. When a deal is to be constructed through a chain of middlemen, these middlemen have to cooperate (in order to construct the deal) while trying to maximize their own profits. The middlemen can be seen as propagating constraints along the chain, with the aim to maximize its profit while satisfying all the bargainers' constraints (failing that, the chain will break down). In this paper, a simple chainbargaining problem is defined. It is used to study constraint propagation strategies, which are essential components of automatic bargaining

Power brokers: Middlemen in legislative bargaining

We study a model of decentralized legislative bargaining over public decisions with transfers. We establish the emergence of middlemen in legislative bargaining as a robust equilibrium phenomenon. We show that legislative intermediation can impact policy outcomes, and can be inefficient. To fulfill this role, the middleman's policy preferences and bargaining position must be such that its role of intermediary is credible. But the political middleman must also directly benefit from policy change. The results highlight fundamental differences between the role of intermediaries in politics and exchange economies

Middlemen: the visible market makers

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

On bargaining sets of supplier-firm-buyer games

We study a special three-sided matching game, the so-called supplier-firm-buyer game, in which buyers and sellers (suppliers) trade indirectly through middlemen (firms). Stuart (1997) showed that all supplier-firm-buyer games have non-empty core. We show that for these games the core coincides with the classical bargaining set (Davis and Maschler, 1967), and also with the Mas-Colell bargaining set (Mas-Colell, 1989)

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.

Middlemen in Search Equilibrium

This paper shows how including divisibility of goods and productive heterogeneity leads to the emergence of middlemen in an equilibrium search environment. In the baseline model, middlemen are welfare reducing and their number increases as market frictions are reduced. When the model is extended to allow for time taken in production and increasing returns-to-scale in the market meeting technology, middlemen can be beneficial to society by speeding up the meeting process.

MIDDLEMEN: THE VISIBLE MARKET MAKERS

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.

Middleman margins and asymmetric information: an experiment with potato farmers in West Bengal

West Bengal potato farmers cannot directly access wholesale markets and do not know wholesale prices. Local middlemen earn large margins; pass-through from wholesale to farm-gate prices is negligible. When we informed farmers in randomly chosen villages about wholesale prices, average farm-gate sales and priceswere unaffected, but pass-through to farm-gate prices increased. These results can be explained by a model where farmers bargain ex post with village middlemen, with the outside option of selling to middlemen outside the village. They are inconsistent with standard oligopolistic models of pass-through, search frictions or risk-sharing contracts.Accepted manuscrip

Asymmetric information and middleman margins: an experiment with indian potato farmers

West Bengal potato farmers cannot directly access wholesale markets and do not knowwholesale prices. Local middlemen earn large margins; pass-through from wholesale to farmgate prices is negligible. When we informed farmers in randomly chosen villages about wholesale prices, average farmgate sales and prices were unaffected, but pass-through to farmgate prices increased. These results can be explained by a model where farmers bargain ex post with village middlemen, with the outside option of selling to middlemen outside the village. They are inconsistent with standard oligopolistic models of pass-through, search frictions, or risk-sharing contracts.We acknowledge grants from the Hong Kong Research Grants Council, the International Food Policy Research Institute in Washington DC, the International Growth Centre at the London School of Economics, the Hong Kong Research Grants Council, and USAID's Development Innovation Ventures program. We are grateful to three anonymous referees, Abhijit Banerjee, Francesco Decarolis, Jordi Jamandreu, Dan Keniston, Asim Khwaja, Kaivan Munshi, Rohini Pande, Marc Rysman, Chris Udry, and participants at several seminars and conferences. We received excellent research assistance from Khushabu Kasabwala, Prathap Kasina, Arpita Khanna, Clarence Lee, Owen McCarthy, Sanyam Parikh, Moumita Poddar, Sunil Shoo, and Ricci Yeung. All errors are our own. (Hong Kong Research Grants Council; International Food Policy Research Institute in Washington DC; International Growth Centre at the London School of Economics; USAID's Development Innovation Ventures program)Accepted manuscrip