Abstract

Intermediation is a prominent feature of the modern economy. Two features of intermediated exchange are salient. One, there are multiple intermediaries between the `source’ and the `destination’. So different intermediaries need to coordinate their actions to ensure that exchange does take place. The second feature is market power: some intermediaries may lie on many paths between buyer and seller. We develop a network model with many traders: some of these traders can undertake exchange directly with each other, while others can only undertake exchange via other traders. We allow for all possible networks, subject to the caveat that there exists at least one path between every pair of traders. Traders set prices and trade occurs through minimum cost routes.

We show that coordination among intermediaries is key to the efficiency of exchange. Strategic interaction delivers extremal outcomes for intermediation costs: either buyer and seller or the intermediaries extract all surplus. Finally, we show that intermediaries with market power extract the entire surplus of trade.

This is joint work with Syngjoo Choi and Andrea Galeotti.