Creator: Wong, Yuet-Yee and Wright, Randall D. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 691 Abstract:
We study bilateral exchange, both direct trade and indirect trade that happens through chains of intermediaries or middlemen. We develop a model of this activity and present applications. This illustrates how, and how many, intermediaries get involved, and how the terms of trade are determined. Bargaining with intermediaries depends on how they bargain with downstream intermediaries, leading to interesting holdup problems. We discuss the roles of buyers and sellers in bilateral exchange, and how to interpret prices. We develop a particular bargaining solution and relate it to other solutions. We also illustrate how bubbles can emerge in the value of inventories.
Keyword: Bargaining, Middlemen, and Search Subject (JEL): D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, E40 - Money and Interest Rates: General, and C78 - Bargaining Theory; Matching Theory