Competition among Middlemen when Buyers and Sellers can Trade Directly
JEL Classification D4, L1, G2
Department of Economics, Trinity College, Dublin 2, Ireland.
AbstractThis 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.
AcknowledgementsThis 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.