Online Dealers versus Brick-and-Mortar Stores: A Welfare Analysis

Online intermediaries play an increasingly important role in numerous markets. The literature on intermediation has mainly considered intermediaries as information gatekeepers, a role limited to advertising sellers’ prices. This paper focuses on intermediaries as dealers or resellers, who acquire final goods through wholesale trade with producers. Consumers often believe that intermediaries can benefit them by mitigating information imperfections. But in many cases, intermediary entry actually lowers consumer surplus, and having more than one intermediary in the one-producer setting allows the monopolist producer to extract the entire consumer surplus. In all cases, however, conditions exist under which the presence of an intermediary improves overall welfare, including producer surplus.