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Wednesday, September 21, 2016

In Defense of the Middleman

Contrary to popular belief, middlemen do add value by providing greater accessibility and product awareness.

As with the Kristen Bell video that I riffed on in this earlier post, several people have sent me the link to this recent NPR report on the alleged shadiness of “middlemen.”  My goal here is neither to address the issue of middlemen in full nor to justify every aspect of the particular re-selling that is featured in this NPR report.  Rather, my point is simply to say a kind word about the middleman and middlemen.

Middlemen do add something to the product: greater accessibility.

Middlemen are woefully misunderstood and, hence, condemned – as revealed, for example, by this question asked by NPR reporter Stacey Vanek Smith to someone who was buying a product from its producer at one price and reselling it to consumers at a higher price:

Did you ever feel like we’re not actually doing anything? You know what I mean? Like, you’re not adding anything to the product. Did you feel weird about that?

Middlemen and Accessibility

But middlemen do add something to the product: greater accessibility.  This greater accessibility can be geographic – as when supermarkets collect tens of thousands of different grocery items from around the world into retail stores, each located a short distance from most consumers’ homes.  This greater accessibility can come in the form of more peace of mind for consumers – as when supermarkets warrant, both formally and informally, the products that they sell: if you buy from your local supermarket a gallon of milk that’s sour, you can return it to your local supermarket and get your money back or a gallon of fresh milk.  This greater accessibility can come in the form of more information – as when a supermarket discovers some grocery item that you’ve never heard of and brings it to your attention (say, by displaying it prominently) when you visit the supermarket.

Each consumer is free, on his or her own, to visit farms and factories and processing plants in order to purchase items directly from producers.  But, of course, such visits would be enormously time consuming and would cost quite a lot in airfare and other travel expenses.  We know that retailers and other middlemen perform valuable services because we observe consumers, everyday, voluntarily paying for these services.

Here’s an ode to middlemen that I wrote a few years ago.

Knowledge Asymmetry

As for the particular middleman service featured in the NPR report, I will here say one word about it.  One might conclude that buying from the producer product X at $40 and reselling product X to consumers for $60 is a means of ripping-off consumers.  But before you reach this conclusion, ask: why do consumers pay this higher price?  It must be because, not only do they value this good by at least as high as $60, they also are unaware of the availability of this product at the lower price.  We can all agree that it’s unfortunate that consumers don’t have perfect – or at least fuller – knowledge of prices  Were consumers better informed of prices, the middlemen who buy on-line at $40 and then resell on-line at $60 would have to find some other line of work, because consumers would themselves buy directly on-line at $40.  Yet, obviously, many consumers in fact don’t know of the product’s availability at the lower price.  That’s the reality, however unfortunate it might be.

The middlemen who buy the product at $40 and then offer to resell it to consumers at $60 must have some better means than do the product’s manufacturer of alerting consumers to the availability of this product, for otherwise consumers would buy it on-line directly from the manufacturer at the manufacturer’s lower price.  So the markup that the resellers get by reselling this product at the higher price is the return to these resellers of being more successful than is the product’s manufacturer of making consumers aware of the availability of this product.  This awareness is what the resellers add to this product.  And it is valuable.

A version of this article was first published by Cafe Hayek.

  • Donald J. Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.