Working Paper 691

Buyers, Sellers and Middlemen: Variations in Search Theory

Randall Wright | Consultant
Yuet-Yee Wong

Published October 11, 2011

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. Bargaining with intermediaries depends on how they bargain with downstream intermediaries, leading to interesting holdup problems. We discuss the roles of buyers and sellers in bilateral exchange, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. We also illustrate how bubbles can emerge in the value of inventories.

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