Cutting Out the Middleman: The Structure of Chains of Intermediation

Working Paper
Published on 1 April 2022

A previous version of this paper was published in October 2020.

Abstract

Distribution of goods often involves multiple intermediaries sequentially buying and reselling. We show that multi-intermediary chains arise in response to internal economies of scale in trade costs, and that this can account for patterns in firm size and prices we document in original data on consumer goods in Nigeria. Interventions that shorten chains involve a fundamental welfare trade-off: they lower marginal cost but also the number of sellers, reducing competition, product availability, and access to retailers. We embed this general insight in a quantifiable model, and find that for apparel in Nigeria, cutting out middlemen often harms more remote consumers.

Authors

Matthew Grant

Dartmouth College

Meredith Startz

Dartmouth College