The Need for Middlemen in Trading Networks
https://www.isoc.org/inet2000/cdproceedings/7d/7d_3.htm
An integral part in almost every trade network is the middleman, the person or entity who facilitates trade between producers and consumers. At first thought, the middleman may seem like an unnecessary part to a trade network. Some may think that the middleman simply increases the price that a consumer is forced to pay for some good. However, the middleman must have some value to the network, or the producer and consumer would deal with each other directly. The middleman adds value by increasing the ease with which the producer is able to distribute their goods to consumers and increasing the ease with which consumers are able to obtain goods from producers. Most producers only have one or a few production locations but want to sell their goods over much wider areas. At the same time, consumers do not want to have to go way out of their way in order to obtain a good that they want or need. For example, a farmer may only be harvesting a crop, say corn, in one location, but he will still want to sell his corn to many people across a large region. In order to do this, he might sell his corn to several grocers, who act as the middlemen, who are located in different areas. These grocers will then be able to sell his corn to many people over a wide area, just like he wants. On the other end, consumers may want to eat corn, but they would not want to travel all the way out to the farmer’s field in order to get it. Instead, they would go to their local grocery store, middleman, and buy the corn there. While the corn may be more expensive at the grocery store than if it was bought from the farmer directly, the consumer will save the time and hassle of having to go all the way to the farm.
Another advantage of the middleman to the trade network is that the middleman makes both the producer and the consumer more comfortable and willing to trade. As consumers, we want to make sure that we are paying a fair price for the products that we buy, and we are always fearful of being taken advantage of. As producers, we want to make sure that we receive fair compensation from our customers for the goods and/or services that we provide. The middleman will act as a third party that is trusted by both the producer and the consumer and will ensure both parties that they are getting a fair deal. Having trusted middlemen will increase the number of buyers and sellers who are willing to trade in the network. This will increase overall trade and generate benefits for everyone.
One example involving middlemen that we analyzed in class was the trade in a developing country example. In this example, buyers and sellers lived on both sides of a river, but they were unable to cross the river if they wanted to buy or sell goods and/or services. This created two smaller, independent markets, one on each side. However, there was a trader on each side of the river who had the ability to facilitate trader across the river. These traders acted as the middlemen. They allowed buyers to buy goods from a wider range of sellers, and they allowed sellers to sell goods over a wider area, as well. This combined the two smaller markets into one bigger market where both buyers and sellers had more options. These traders allowed the volume of trade to increase, which boosts economic activity and would benefit many people in this developing country.