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- Title
Intermediation.
- Authors
Cosimano, Thomas F.
- Abstract
The article presents a parametric model that explains why individuals choose to trade with an intermediary. This choice is based on a comparison of the gain from trading with the intermediary with the expected gain from entering a matching process where individuals can choose to be direct buyers, direct sellers or non-participants. The intermediary provides a service by making the product more liquid by lowering the probability of an unsuccessful trade. However, the individuals who choose to remain direct traders are made worse off by the existence of the intermediary. It is also possible to analyze the welfare effects of the intermediary since the optima! decision process of all the agents is specified in the matching game. The net gain in welfare for the agents with extreme valuation of the good increases since they are able to guarantee the gains from trade by trading with the intermediary. The net welfare of the marginal buyers from the intermediary is lower, since they trade with a seller, i.e. the intermediary, who has a higher average valuation, i.e. the ask price. Finally, the net welfare of the agents who choose to remain direct buyers is lower, since they trade with direct sellers who have higher average valuations. Consequently the introduction of the intermediary may increase or decrease society's welfare.
- Subjects
INTERMEDIATION (Finance); MERCHANTS; DIRECT selling; PURCHASING agents; ASKED price; VALUATION
- Publication
Economica, 1996, Vol 63, Issue 249, p131
- ISSN
0013-0427
- Publication type
Article
- DOI
10.2307/2554638