Introduction
We study bilateral exchange, both direct trade, and indirect trade that happens through
intermediaries, or middlemen. We develop a model of this activity and present a sequence
of applications. The framework illustrates how, and how many, middlemen get involved.
Although there is much economic research on the topic, in general, a neglected aspect that
seems important to business practitioners is that there are often multiple middlemen engaged
in getting goods from the originator to end user ñe.g., from farmer to broker to distributor
to retailer to consumer.1 A feature we emphasize is that the terms of trade one might
negotiate with an intermediary depend on upcoming negotiations with the second, third
and other downstream intermediaries. We call this bargaining with bargainers. We also have
something to say about the roles of buyers and sellers ñ in particular, which are which
ñ in bilateral exchange, and about the interpretation of prices. We develop a particular
bargaining solution and discuss how it relates to other solutions. Additionally, we illustrate
how bubbles can emerge in the value of inventories as they get traded across intermediaries.
In terms of related work, it was not so long ago that Rubinstein and Wolinsky (1987)
motivated their paper as follows: