Intermediation in a Directed Search Model

18 Pages Posted: 29 Oct 2018 Last revised: 16 Nov 2018

See all articles by Klaus Kultti

Klaus Kultti

University of Helsinki - Department of Political and Economic Studies

Tuomas Takalo

Bank of Finland, Monetary Policy and Research Department; VATT Institute for Economic Research

Oskari Vähämaa

University of Turku; Bank of Finland - Research

Date Written: October 26, 2018

Abstract

We study the ability of competitive coordination service platforms (such as auction sites and real estate agents) to facilitate trade in a directed search model where buyers have unit demands and each seller only has one good to sell. The sellers’ capacity constraint leads to a coordination problem as in a symmetric equilibrium without intermediation some sellers receive multiple buyers while some are left without any customers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. We find that roughly 20 percent of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are roughly 25 percent lower than in the economy without intermediation.

Keywords: directed search, intermediation, middlemen

JEL Classification: D4, L1

Suggested Citation

Kultti, Klaus and Takalo, Tuomas and Vähämaa, Oskari, Intermediation in a Directed Search Model (October 26, 2018). Bank of Finland Research Discussion Paper No. 20/2018. Available at SSRN: https://ssrn.com/abstract=3273754

Klaus Kultti (Contact Author)

University of Helsinki - Department of Political and Economic Studies ( email )

P.O. Box 17
FIN-00014 Helsinki
Finland

Tuomas Takalo

Bank of Finland, Monetary Policy and Research Department ( email )

P.O. Box 160
Helsinki, FIN-00101
Finland

HOME PAGE: http://https://sites.google.com/site/tuomastakalo/

VATT Institute for Economic Research

Oskari Vähämaa

University of Turku ( email )

Turku, 20014
Finland

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

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