Intermediation and Resale in Networks

We study intermediation in markets with a network structure. A good is sequentially resold via bilateral bargaining between linked intermediaries until it reaches one of several buyers. A decomposition of the network into layers captures intermediation power. Competitive forces allow intermediaries to demand the full surplus when they resell the good within a layer, while trades between layers involve hold-ups that entitle downstream parties to intermediation rents. A trader’s intermediation power does not depend directly on the number of intermediaries needed to access buyers, but on the competition among intermediation chains measured by the number of layers separating the trader from buyers. Only players serving as gateways to lower layers earn profits. Trade does not maximize welfare or minimize intermediation. The interplay between competition and hold-ups determines the extent of intermediation inefficiencies. The elimination of a middleman and the transfer of intermediation costs downstream increase seller profits. Horizontal and vertical integration have ambiguous effects on efficiency and seller, buyer, and consolidated intermediary profits.