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Middlemen: A Directed Search Equilibrium Approach

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  • Makoto Watanabe

    (VU University Amsterdam)

Abstract

This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why popular items are sold at a larger premium, and everyday items at a larger discount, by large-scaled intermediaries. The concentration of middlemen's market, i.e., few middlemen, each with large capacity, can lead to a higher matching efficiency, but with a lower total welfare, compared to having many middlemen, each with small capacity.

Suggested Citation

  • Makoto Watanabe, 2012. "Middlemen: A Directed Search Equilibrium Approach," Tinbergen Institute Discussion Papers 12-138/V, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20120138
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    Cited by:

    1. Pieter Gautier & Bo Hu & Makoto Watanabe, 2023. "Marketmaking Middlemen," RAND Journal of Economics, RAND Corporation, vol. 54(1), pages 83-103, March.
    2. Athanasios Geromichalos, 2012. "Directed Search and the Bertrand Paradox," Working Papers 1221, University of California, Davis, Department of Economics.
    3. Benjamin Lester & Guillaume Rocheteau & Pierre‐Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, June.
    4. Randall Wright & Yuet‐Yee Wong, 2014. "Buyers, Sellers, And Middlemen: Variations On Search‐Theoretic Themes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 55(2), pages 375-397, May.
    5. Derek Stacey, 2019. "Posted Prices, Search and Bargaining," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 85-104, July.
    6. Yuet-Yee Wong & Randall Wright, 2011. "Buyers, sellers and middlemen: variations in search theory," Working Papers 691, Federal Reserve Bank of Minneapolis.
    7. Holzner, Christian Ludwig & Watanabe, Makoto, 2015. "Labor Market Equilibrium with Public Employment Agency," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113097, Verein für Socialpolitik / German Economic Association.
    8. Fei Li & Charles Murry & Can Tian & Yiyi Zhou, 2024. "Inventory Management In Decentralized Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(1), pages 431-470, February.

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    More about this item

    Keywords

    Directed Search; Intermediation; Inventory holdings;
    All these keywords.

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • F1 - International Economics - - Trade
    • G2 - Financial Economics - - Financial Institutions and Services
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • L8 - Industrial Organization - - Industry Studies: Services
    • R1 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics

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