Measuring the Welfare of Intermediaries

Abstract

We investigate the welfare of intermediaries in oligopolistic markets where intermediaries offer additional services. We exploit the unique circumstance that in the empirical setting studied, outdoor advertising, consumers can purchase from manufacturers or intermediaries. Intermediaries provide additional services to the consumers and charge a margin for them. Intermediaries provide the following additional services: search services (information about products), purchase-aggregation services (access to quantity discounts), and consulting services. We specify an equilibrium model and structurally estimate it using market-level data. The demand includes consumers with costly search and channel-specific preferences. The supply includes two distribution channels. One features bargaining about wholesale prices between manufacturers and intermediaries and downstream price competition. The other is vertically integrated. We show how Google search data can be used to identify the search-cost parameters. We use the estimated model to simulate counterfactual scenarios where intermediaries do not offer additional services. We find that the three services considered provide value to consumers, with search playing a prominent role. Our analysis helps explain why intermediaries are ubiquitous in modern economies despite the double marginalization. This paper was accepted by Matthew Shum, marketing. Funding: The authors acknowledge the allocation of computing time from the Ohio Supercomputer Center [Grant PAS1350-2]. This study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior – Brasil (CAPES) – Finance Code 001. This work was also supported by Fundação para a Ciência e a Tecnologia [Grant UIDB/00315/2020]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.4266 .