Abstract

In many decentralized markets buyers rely on intermediaries to find sellers. This paper argues that intermediaries can affect buyer welfare both directly by reducing expenses of buyers with high search cost but also indirectly through a search externality that affects the prices paid by those buyers that do not use intermediaries. To investigate these two effects this project uses data from the New York City trade-waste market in which all businesses in the city contract individually with private waste carters to arrange for their waste disposal. Search in this market is costly for buyers because of the large number of sellers and the idiosyncratic nature of the contractual arrangements. Buyers can either search and haggle by themselves or through a waste-broker. Combining elements from the empirical search and procurement-auction literature, I construct and estimate a model for such a decentralized market setting. Results from the model show that buyers both in the broker market and in the search market benefit significantly from the activity of intermediaries. Intermediaries also improve overall welfare by reducing the cost of price discovery and the mis-allocation of sales to higher cost sellers.

View Paper

For future Strategy Area seminars, please see: Strategy Seminar Series