A1 Refereed original research article in a scientific journal
Intermediation in a directed search model
Authors: Kultti Klaus, Takalo Tuomas, Vähämaa Oskari
Publisher: WILEY
Publication year: 2021
Journal: Journal of Economics and Management Strategy
Journal name in source: JOURNAL OF ECONOMICS & MANAGEMENT STRATEGY
Journal acronym: J ECON MANAGE STRAT
Number of pages: 16
ISSN: 1058-6407
eISSN: 1530-9134
DOI: https://doi.org/10.1111/jems.12413(external)
Web address : https://onlinelibrary.wiley.com/doi/10.1111/jems.12413(external)
Self-archived copy’s web address: https://www.econstor.eu/handle/10419/212428(external)
Abstract
We provide an example where establishing competitive coordination service platforms is so lucrative that they end up reducing welfare. We consider a canonical directed search model in which buyers have unit demands and sellers' capacity constraint leads to a coordination problem: in a symmetric equilibrium without intermediation some sellers receive too many and some too few buyers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. In this setup, roughly one-fifth of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are lower than that in the economy without intermediation.
We provide an example where establishing competitive coordination service platforms is so lucrative that they end up reducing welfare. We consider a canonical directed search model in which buyers have unit demands and sellers' capacity constraint leads to a coordination problem: in a symmetric equilibrium without intermediation some sellers receive too many and some too few buyers. We compare this equilibrium to one where sellers and buyers can choose to become intermediaries who coordinate the meetings. In this setup, roughly one-fifth of agents become intermediaries. As a result, a large part of the supply and demand in the economy vanishes. Moreover, the large amount of intermediaries actually reduces the meeting efficiency. Jointly, these effects imply that the gains from trade are lower than that in the economy without intermediation.
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