Cutting Out the Middleman: The Structure of Chains of Intermediation

Abstract

Finished goods may pass along a whole chain of intermediaries on their way from producers to consumers. Using original survey data from Nigeria, we document that there are at least 3 separate intermediaries between an international manufacturer and a Nigerian consumer on average, and that the characteristics of these intermediaries and their transactions are systematically related to their position along the distribution chain. We build a general framework for understanding why chains with multiple intermediaries form and illustrate their implications for consumer welfare and measuring trade costs. Contrary to the common intuition, consumers can benet from being at the end of longer chains of intermediation. Taking chains into account also suggests that existing estimates of distance costs in developing countries are biased upward, and may contribute less to consumer-producer price gaps than typically thought. We then build a quantiable version of the general model, which relates the endogenous chain structure through which goods actually reach consumers in a particular market to fundamentals of geography and demand in many locations, and calibrate it in the context of Nigerian wholesale trade. This work is part of the Private Enterprise Development in Low Income Countries (PEDL) programme