Competition among Middlemen When Buyers and Sellers can Trade Directly
This paper examines how the introduction of a direct trade alternative for buyers and sellers affects competition among middlemen. Direct trade makes middlemen’s supply and demand functions depend on both bid and ask prices, a feature we term interdependence. A simple model is used to illustrate this phenomenon and to show how interdependence effects depend on the efficiency of direct trade. We find that direct trade does not alter Stahl’s (1988) finding that middlemen may ‘corner’ the market. This occurs under different conditions and with smaller distortions if there is an active direct trade possibility for sellers and buyers, however.
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