Middlemen: A directed search equilibrium approach

This paper studies an intermediated market operated by middlemen with high inventory holdings. I present a directed search model in which middlemen are less likely to experience a stockout because they have the advantage of inventory capacity, relative to other sellers. The model explains why the empirical relationship between middlemen's premium and their inventory capacity can be positive in some markets (e. g., rental video shops, used-car dealers) and negative in other markets (e. g., supermarkets, theater ticket offices). I also examine the implication of the configuration of middlemen's market in terms of the size and the number of middlemen for the equilibrium premium with and without free entry.