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Meredith Startz: Cutting Out the Middleman: The Structure of Chains of Intermediation

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Moynihan Institute of Global Affairs

Trade, Development and Political Economy


Meredith Startz

Assistant Professor, Department of Economics

Dartmouth College

"Cutting Out the Middleman: The Structure of Chains of Intermediation"

Distribution of goods often involves chains of intermediaries engaged in sequential buying and reselling. Why do such chains arise, and how do they affect consumers and their ability to gain from trade? This paper shows that the existence of internal economies of scale in trade logistics is a sufficient mechanism to yield chains with multiple intermediaries, and that this suggests consumers in developing countries are more likely to be served via long chains. Contrary to common wisdom, cutting middlemen out can, but does not necessarily, benefit consumers. Instead, there is a fundamental tradeoff between costs and entry that means even pure reductions in trade costs can have perverse effects. The proposed mechanism is simple, but can account for empirical patterns in wholesale firm size, prices and markups that we document using original survey data on imported consumer goods in Nigeria. We estimate a structural version of the model for distribution of Chinese-made apparel in Nigeria, and describe endogenous restructuring of chains and the resulting impacts on consumer welfare in response to counterfactual changes in regulation, e-commerce technologies, and transport infrastructure.

Meredith Startz is an assistant professor in the Dartmouth economics department. Her research is at the intersection of development and trade, and focuses on how contracting problems shape transactions and firms in developing countries.

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