Search and Trading in Intermediated Markets

This paper examines the effect of a middleman on the search and trading behavior of the traders. It is shown that the buyer and seller types with middle valuations choose to search for each other, while the buyer and seller types with high or low valuations drop out of the search market and choose to trade directly with the middleman. The ask and bid prices of the middleman act as an outside option for the buyer and seller, and influence the outcome of the bargaining between the two. The model generalizes Gehrig (1993) by endogenizing the traders’ search intensities, by allowing the traders to go to an intermediary even if thy have engaged in search, and by enabling the intermediary to provide the service of immediacy.