Abstract
People often call distribution the “Dark Continent” of the economy. Most conventional models have diffcultly of exploring the working and performance of distributors, i.e., a sequence of intermediaries which connect producers with consumers. We have yet to adopt a new approach to distributive intermediation. The main purpose of this paper is to investigate the informational role of intermediaries in the market economy, thus shedding new light on the Dark Continent.
In the ideal world of certainty, producers and consumers may meet each other face to face, causing no frictions throughout trading. The presence of distributors would merely serve as a complication factor for the linkage between producers and consumers. Indeed, we can show that when distributors enter as middlemen, output decreases and consumer price rises, whence social welfare declines.
The question to ask is how the presence of demand uncertainty changes the welfare results obtained for the world of certainty. In order to emphasize informational asymmetry, we assume that the distributor is fully informed about demand but the producer is not so informed. Then we can see that whenever the uncertainty is large, the entry of the informed distributor increases social welfare. However, the risk neutral distributor has no incentive to reveal private information to the producer.
If the distributor displays risk aversion and maximizes the expected utility of profit rather than the expected profit per se, then the situation must change completely. It is due to fact that in the case of risk aversion, information sharing implies the sharing of risk-bearing as well through its effect on the variance of the profit. Consequently, if the uncertainty is large enough, the risk-averse distributor may wish to share the information with the producer.
To sum up, whenever demand uncertainty is present and the distributor has a significant advantage over the producer in collecting the information, the economy with distribution channels is socially more desirable than the one without. Moreover, if the distributor exhibits strong risk aversion, then he wishes to share the information with the producer. Further research on this area should be awaited.
