Some Observations on the Law and Economics of Intermediaries

Abstract:     
This essay, to be published in connection with a symposium held at Michigan State University College of Law in April 2005 and titled "W(h)ither the Middleman: The Role and Future of Intermediaries in the Information Age," presents a short overview of some of the legal and economic issues relating to intermediation and disintermediation in the digital era. Intermediaries can be defined as economic agents that help to reduce the cost of buyer-seller transactions, by enabling buyers and sellers to find one another and to sort, classify, and distribute information to one another. Although some observers, as early as the late 1980s, predicted that the digital revolution would lead to the demise of intermediaries ("disintermediation"), others argued instead that intermediaries would still be necessary to perform a variety of services, and that the need for new types of intermediaries would increase. My review of the relevant literature, much of which derives from a now-classic 1995 paper by Sarkar, Butler, and Steinfield, convinces me that the latter view was largely correct. In addition, I discuss some ways in which law might play a useful role in reducing the social costs of acquiring, evaluating, and managing information, or enabling the further reduction of these costs. Using the law of copyright and of false advertising as examples, however, I argue that formulating the optimal legal response, if any, to the transaction cost reduction problem can be quite difficult, given the unpredictability of both technological progress and of market responses to both legal and technological change.

Accepted Paper Series