Working Paper: NBER ID: w17511
Authors: Yuetyee Wong; Randall Wright
Abstract: We study bilateral exchange, both direct trade and indirect trade that happens through chains of intermediaries or middlemen. We develop a model of this activity and present applications. This illustrates how, and how many, intermediaries get involved, and how the terms of trade are determined. We show how bargaining with one intermediary depends on upcoming negotiations with downstream intermediaries, leading to holdup problems. We discuss the roles of buyers and sellers in bilateral exchanges, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. In addition to contrasting our framework with other models of middlemen, we discuss the connection to different branches of search theory. We also illustrate how bubbles can emerge in intermediation.
Keywords: bilateral exchange; intermediaries; search theory; bargaining; market dynamics
JEL Codes: D2; D4; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bargaining power of one intermediary (L14) | terms of trade negotiated with an intermediary (F19) |
| negotiations with downstream intermediaries (L14) | holdup problems (D86) |
| structure of intermediation (G00) | variations in prices (P22) |
| structure of intermediation (G00) | trade efficiency (F14) |
| trading dynamics (F12) | price fluctuations (E30) |
| configuration of the intermediation chain (L14) | emergence of bubbles (E32) |