Supply Chain Intermediation: A Bargaining Theoretic Framework

Abstract

This chapter explores the theory of supply chain intermediation. Using a bargaining theoretic framework, we set out to examine why intermediaries exist, different forms they operate, and the way they influence supply chain efficiency. The notion of intermediary has its root in the economics literature, referring to those economic agents who coordinate and arbitrate transactions in between a group of suppliers and customers. Distinctions are often drawn between a “market maker” and a “broker” intermediary Resnick et al., 1998. The former buys, sells, and holds inventory (e.g., retailers, wholesales), while the latter provides services without owning the goods being transacted (e.g., insurance agents, financial brokage). Sarkar et al. (1995) offer a list of various intermediation services. They distinguish the services that benefit the customers (e.g. assistance in search and evaluation, needs assessment and product matching, risk reduction, and product distribution/delivery) and those that benefit the suppliers (e.g. creating and disseminating product information). Taking a step further, Spulber (1996) views intermediary as the fundamental building block of economic activities. He proposes the intermediation theory of the firm which suggests that the very existence of firms is due to the needs for intermediated exchange between a group of suppliers and customers. A firm is created when “the gains from intermediated exchange exceed the gains from direct exchange (between the supplier and the customer).” He also suggests that “with intermediated exchange, firms select prices, clear markets, allocate resources, and coordinate transactions” By this definition, firms are intermediaries which establish and operate markets.

S. David Wu is supported by NSF Grants DMI-0075391 and DMI-0121395