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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. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," NBER Working Papers 13360, National Bureau of Economic Research, Inc.
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  15. Alok Johri & Lohn Leach, 2000. "Middlemen and the Allocation of Heterogeneous Goods," Department of Economics Working Papers 2000-06, McMaster University.
  16. Li, Yiting, 1998. "Middlemen and private information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 42(1), pages 131-159, June.
  17. Gary Biglaiser, 1993. "Middlemen as Experts," RAND Journal of Economics, The RAND Corporation, vol. 24(2), pages 212-223, Summer.
  18. Asher Wolinsky, 1983. "Retail Trade Concentration Due to Consumers' Imperfect Information," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 14(1), pages 275-282, Spring.
  19. B. Douglas Bernheim & Jonathan Meer, 2007. "How Much do Real Estate Brokers Add? A Case Study," Discussion Papers, Stanford Institute for Economic Policy Research 06-041, Stanford Institute for Economic Policy Research.
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