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Pure-Middlemen Under Asymmetric Information
Zhaogang Song
Shandong University
May 5, 2005
Abstract:
Because of the wide use of two kinds of intermediaries - pure-intermediaries and middlemen - in many commodity markets of China, we present a model in which the market microstructure of trades is endogenously determined. Buyers and sellers of a commodity can not trade directly but are permitted to choose between two competing types of intermediaries - middlemen and pure-intermediaries which are important but overlooked by economists. We characterize the choices of buyers and sellers, the behavior of monopoly pure-intermediaries, and the reaction of middlemen to the free entry of pure-intermediaries. Furthermore, considering the possibility that there is information asymmetry between buyers and any intermediary of the two types, we extend the model to include the factor of asymmetric information under the conditions that the choices of sellers are overlooked and the behavior of middlemen and pure-intermediaries is given. Following this buyer-oriented model, we find that the asymmetric information problem has a contingent effect on the microstructure of trade: if the ratio of the extent of information asymmetry between pure-intermediaries and middlemen is above the critical value, buyers with higher valuations towards a commodity thus more inclined to trade will transact via pure-intermediary; otherwise, they will select middlemen.
Keywords: information asymmetry middlemen pure-intermediaries
Concepts and Characteristics of Middleman Trade
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