Competition among Middlemen when Buyers and Sellers can Trade Directly

JEL Classification D4, L1, G2

John Fingleton

Department of Economics, Trinity College, Dublin 2, Ireland.

Abstract

This paper examines how the introduction of a direct trade alternative for buyers and sellers affects competition among middlemen. Direct trade makes the 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. However, this occurs under different conditions and with smaller distortions if there is an active trade possibility for sellers and buyers.

Acknowledgements

This paper is drawn on material from my D.Phil. thesis at the University of Oxford under the supervision of Jim Mirrlees. I am grateful to him and to Meg Meyer, Patrick Waldron, anonymous referees and participants at various seminars for helpful comments and suggestions. All errors are mine.