Intermediary Market Analysis PDF

Introduction Observation Most products and services are not sold directly from the producer to the final consumer but pass through intermediaries. Platform Operator. The intermediary provides a Dealer. The intermediary buys goo...

Introduction Observation Most products and services are not sold directly from the producer to the final consumer but pass through intermediaries. Platform Operator. The intermediary provides a Dealer. The intermediary buys goods or services platform where buyers and sellers (or more generally from suppliers and resells them to buyers. various groups of agents with complementary businesses) are able to interact. ROLES OF INTERMEDIARIES Infomediary. The intermediary acts as an Trusted Third Party. The intermediary acts as a information gatekeeper by allowing consumers to certification agent by revealing information about a access and process information about prices or the product’s or seller’s reliability or quality match value of products and services. 26 Introduction (2) Increasing importance of market intermediaries They are the “visible hands” in the functioning of markets. The digital economy has deeply affected their functioning and their importance. Especially for the roles of Platform operator, Infomediary, and Trusted third party. Example. Amazon.com Dealer: initial business model (pioneer of e-commerce) Platform operator: creation of Amazon Marketplace Infomediary: users review and rate products online Trusted third party: reputation system What we do We contrast the dealer and platform operator roles. We examine the other 2 roles in Module 4. 27 Intermediaries as dealers/platform operators Example of Amazon.com (continued) Amazon.com started its business by buying books from publishers and reselling them to consumers. Business similar to the one of ‘brick-and mortar’ bookstores Why do publishers and readers use the services of Question 1. such intermediaries instead of trading directly with Intermediated or each other? non-intermediated trade? Buyers and sellers may prefer to trade via an intermediary because its improves their matching opportunities. Alongside its dealer business, Amazon also started to operate a platform where third-party sellers can Question 2. trade with Amazon customers. Dealer or platform operator? 28 Intermediated trade or not? Comparison of two market organisations Decentralised market Buyers and sellers are not charged for joining. They interact freely and are matched randomly. Intermediated market An intermediary (a.k.a. “market maker”) buys the product at a “bid” price and resells it at an “ask” price. Claim A market maker can buy and sell the product at a price difference to make a profit, although consumers can participate for free in the random matching market. 29 Intermediated trade or not? (2) Model BUYERS SELLERS Willingness to pay Cost (Maximum buying price) (Minimum selling price) Barry 100 Steve 80 Belinda 60 Sally 20 Gains from trade are assumed to be evenly split. Example Barry and Steve are willing to trade (maximum buying price > minimum selling price) ! If they trade, each earns: 100 − 80 = 10 " If a buyer or seller doesn’t trade, they earn zero. 30 Decentralized matching market Barry 100 Steve 80 Belinda 60 Sally 20 First best The only transaction must Expect surpluses if random matching be between Barry and Sally Lower value if Barry trades 1 100 − 80 1 100 − 20 Barry + = 67 with Steve or Sally with 2 2 2 2 Belinda 1 1 60 − 20 Belinda ×0 + = :; Value created: 100 − 20 = 89 2 2 2 1 100 − 80 1 Steve + ×0 = 7 2 2 2 1 100 − 20 1 60 − 20 Sally + = ≤ @; What does Sally do? If she sells through the intermediary, she gets ! − 20 Otherwise, she trades for sure with Belinda and gets 60 − 20 /2 = 20 So, Sally prefers to sell through the intermediary if A ≥ 6; 32  Barry 100 Steve 80 Intermediated trade. Reseller (2) Belinda 60 Sally 20 Equilibrium (continued) To maximize its profit, the intermediary sets > = @; and A = C;. As " > 60 and ! < 80, Belinda and Steve don’t trade with the intermediary. So, we have an equilibrium. Decentralized market Reseller Barry 25 100 − 90 = 10 Belinda 10 0 The intermediary restores efficiency but Steve 5 0 makes all participants Sally 30 40 − 20 = 20 worse off. Intermediary 0 90 − 40 = 50 TOTAL 70 80 33 Intermediated trade. Reseller (3) Summary There exists an equilibrium in which high value buyers and low cost sellers self-select into the intermediated market. The presence of a profit-maximizing dealer leads to endogenous sorting according to type. The intermediary makes a positive profit because it offers high value buyers and low cost sellers a better deal than what the matching market provides. Intermediated trade also improves welfare by avoiding socially inefficient trade. 34 Intermediated trade. Reseller (3) Exercise Redo the whole analysis with these numbers: Barry 100 Steve 50 Belinda 60 Sally 20 Here, a transaction between Belinda and Steve is also valuable. In the presence of a random- 1. Describes the first-best. matching market, intermediaries 2. Show that the decentralized matching may profitably operate centralized market operates efficiently. exchanges even if the matching 3. Show that there is still room for profitable market in isolation operates intermediation and that intermediation efficiently. Intermediation then leads to market segmentation. leads to market segmentation. 35  Barry 100 Steve 80 Intermediated trade. Platform Belinda 60 Sally 20 Platform’s role and objective Role. Sells access to an infrastructure that allows buyers and sellers to trade &# → Fee charged to buyers / &$ → Fee charged to sellers Objective: Choose (+# , +$ ) such that only Barry and Sally join the platform. Equilibrium Suppose (+# , +$ ) satisfy the above condition. What does Barry do? If he joins the platform, he trades with Sally and gets 100 − 20 /2 − #" Otherwise, he trades with Steve and gets 100 − 80 /2 = 10 So, Barry prefers to buy through the intermediary if J' ≤