Intermediation

This paper presents a parameteric model that explains why individuals choose to trade with an intermediary. This choice is based on a comparison of the gain from trading with the intermediary with the expected gain from entering a matching process where individuals can choose to be direct buyers, direct sellers or non-participants. The intermediary provides a service by making the product more liquid by lowering the probability of an unsuccessful trade. However, the individuals who choose to remain direct traders are made worse off by the existence of the intermediary.