Competition between Intermediated and Direct Trade and the Timing of Disintermediation

JEL Classification C78, D49, O12

John Fingleton

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

Abstract

This paper analyses competition between direct and intermediated trade. We show that a middleman's supply and demand depend on both his bid and ask prices if sellers and buyers have the alternative of trading directly. Multiplicity also prevails. Direct trade does not constrain the market power of a middleman unless it is frictionless. Our results suggest that the timing of disintermediation is likely to be sub-optimal and have implications, more generally, for the analysis many functional goods markets where there are parallel or alternative trade channels for the same good.

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, Paul Klemperer, anonymous referees and participants at various seminars for helpful comments and suggestions. All errors are mine.