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Information Externalities and Intermediaries in Frictional Search Markets

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  • Xianwen Shi
  • Aloysius Siow

Abstract

In frictional matching markets, buyers incur discrete inspection costs when assessing the suitability of goods on offer, and sellers incur discrete 'show' costs. This paper studies how intermediaries can help reduce these costs. Intermediaries, whose value derives from inventory, learning and memory, are shown to exist if goods are sufficiently heterogeneous. Intermediaries may either be firms that buy goods and hold inventory or brokers who search on behalf of their clients but do not buy or hold inventory. The parameter space, in terms of the ratio of inspection to show costs, naturally separates into two regions where firms exist versus where brokers exist.

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Bibliographic Info

Paper provided by University of Toronto, Department of Economics in its series Working Papers with number tecipa-398.

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Length: 27 pages
Date of creation: 21 Mar 2010
Date of revision:
Handle: RePEc:tor:tecipa:tecipa-398

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Keywords: Information Externalities; Intermediaries; Search; Matching;

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  1. Asher Wolinsky, 1983. "Retail Trade Concentration Due to Consumers' Imperfect Information," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 275-282, Spring.
  2. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
  3. Gabriele Camera & Alain Delacroix, 2004. "Trade Mechanism Selection in Markets with Frictions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 851-868, October.
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  8. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
  9. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  10. Edward A. Baryla & Leonard V. Zumpano, 1995. "Buyer Search Duration in the Residential Real Estate Market: The Role of the Real Estate Agent," Journal of Real Estate Research, American Real Estate Society, vol. 10(1), pages 1-14.
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  13. B. Douglas Bernheim & Jonathan Meer, 2007. "How Much do Real Estate Brokers Add? A Case Study," Discussion Papers 06-041, Stanford Institute for Economic Policy Research.
  14. Morgan, Peter & Manning, Richard, 1985. "Optimal Search," Econometrica, Econometric Society, vol. 53(4), pages 923-44, July.
  15. Spulber, Daniel F, 1996. "Market Making by Price-Setting Firms," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 559-80, October.
  16. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, vol. 42(1), pages 131-159, June.
  17. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-41, February.
  18. Alp Atakan, 2005. "Assortative Matching with Explicit Search Costs," 2005 Meeting Papers 218, Society for Economic Dynamics.
  19. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  20. Gehrig, Thomas, 1993. "Intermediation in Search Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 97-120, Spring.
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