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 popular items are sold at a larger premium, and everyday items at a larger discount, by large-scaled intermediaries. The concentration of middlemen's market, i.e., few middlemen, each with large capacity, can lead to a higher matching efficiency, but with a lower total welfare, compared to having many middlemen, each with small capacity.
# 12-138/V (2012-12-10)
- Makoto Watanabe, VU University Amsterdam
- Directed Search, Intermediation, Inventory holdings
- JEL codes:
- D4, F1, G2, L1, L8, R1