Intermediaries and Trade Efficiency
28 Pages Posted: 16 Aug 2005
Date Written: August 8, 2005
Bargaining with bilateral asymmetric information is generally not efficient. In this paper, I develop a theoretical model to show that firms can recapture trade efficiency and avoid this surplus loss by adding an intermediary to the trading mechanism. This increase in total surplus motivates firms to invest in distribution channels and reseller networks. In the model, the intermediary serves as a mechanism by which firms can commit to bilaterally favorable prices and coordinate their offers during bargaining. The expected gain to the intermediary is non-negative and the intermediary never suffers an ex-post loss. This result suggests that vertical integration between a producer and a distributor may destroy value, despite its use in removing double marginalization.
Keywords: intermediary, asymmetric information, trade efficiency
JEL Classification: L22, F13, D82, C78, C72
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