Abstract
Abstract This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why the empirical relationship between middlemen’s premium and their inventory capacity can be positive in some markets (e. g., rental video shops, used-car dealers) and negative in other markets (e. g., supermarkets, theater ticket offices). I also examine the implication of the configuration of middlemen’s market in terms of the size and the number of middlemen for the equilibrium premium with and without free entry.
Highlights
This paper presents a simple search model which allows us to study explicitly the dependence of middlemen’s premium on their immediacy service backed by inventory capacity
This effect creates a tighter market that allows to charge a higher price, since the middleman knows that buyers receive zero payoff in the event of a stockout. These conflicting effects cause a non-monotonic response of the price to capacities: it goes up when the initial total supply is scarce. This is because the stockout probability is initially high in the former situation, thereby buyers are prepared to pay a higher premium for a larger inventory when the the initial scarcity of resources is higher
This paper proposed a simple theory of middlemen using a standard directed search approach
Summary
This paper presents a simple search model which allows us to study explicitly the dependence of middlemen’s premium on their immediacy service backed by inventory capacity. These conflicting effects cause a non-monotonic response of the price to capacities: it goes up (down) when the initial total supply is scarce (abundant) This is because the stockout probability is initially high (low) in the former (latter) situation, thereby buyers are prepared to pay a higher premium for a larger inventory when the the initial scarcity of resources is higher. With free entry of middlemen, when the inventory cost is low, there are many operating middlemen This creates a situation of abundant total supply when the individual capacity level is high enough. In this situation, buyers would not appreciate much higher capacities and so the premium they are willing to pay for middlemen can decrease as the middlemen’s market gets more concentrated.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
