We have a love-hate relationship with middlemen. We hate them – brokers or other middlemen – because they can seem like profitable parasites who needlessly put themselves between customers and the people who make and do things. We try to bypass middlemen by shopping at farmers’ markets, buying homemade goods directly from the makers on sites like Etsy, and supporting inventors and entrepreneurs directly by throwing money at them through GoFundMe.
But we also love intermediaries because they make our lives easier. They take care of the logistics that we don’t want to deal with or that we simply can’t handle: locating suppliers, messing with them about volume discounts, filling sea containers, paying import licenses and port inspection costs.
There is no better example of our love-hate relationship with middlemen than our feelings about Amazon. It’s huge and powerful, connecting millions of customers and millions of suppliers. Antitrust authorities have it in their sights. And yet, Amazon was only number 2 of America’s most trusted brands in 2020, after the US Postal Service, according to Morning consultation.
I’m about half convinced by a new book that’s negative about middlemen. It’s called “Direct: The Rise of the Middle Economy and the Power to Go to the Source.” It’s from Kathryn Judge, a law professor at Columbia University. Judge is smart on both economics and law. She has clerked for Judge Richard Posner of the United States Court of Appeals for the Seventh Circuit and Judge Stephen Breyer of the Supreme Court. (She is married to law professor Tim Wu, who is on leave from Columbia to serve as President Biden’s special assistant on technology and competition policy.)
Judge recognizes that intermediaries can provide value. “Mediators make the world as we know it possible,” she writes. “Thanks to intermediaries, people living in the United States today can easily buy goods made on the other side of the world, build a diversified investment portfolio, order groceries from the comfort of their home” and so on.
But she worries that intermediaries can make big profits by abusing their vital position in transactions. And she says the distance they put between customers and suppliers can be downright unhealthy, for example when it’s difficult to trace a food poisoning outbreak back through the long supply chain to its origin. She writes that the rise of middlemen, while lowering costs, “grows new sources of vulnerability, undermines accountability and leaves us all more disconnected.”
Two of its strongest examples are Amazon and the National Association of Realtors. She accuses Amazon of bankrupting a competitor by buying (and later shutting down) Quidsi, the parent company of Diapers.com, and says it may be “necessary” for regulators to separate Amazon from Amazon Marketplace, the platform for third-party sellers. As for the brokers’ association, she says it is using its stranglehold on local multiple listing services to freeze competitors who would save money for homebuyers and home sellers by lowering brokerage fees.
(I asked for comment from both. An Amazon spokeswoman wrote in an email, “We’re not acquiring businesses just to close them. We worked hard for seven years to make Quidsi profitable before it closed.” split from Marketplace, I pointed them to a blog post say that third-party sellers benefit from using Amazon’s delivery system. A spokesperson for the National Association of Realtors issued a statement saying that under a rule issued in November highlighting existing policies, “compensations offered to buyers’ agents must be disclosed freely and openly.” Under the rule, his statement said, “Listings are never excluded from search results based on the amount of compensation offered to buyers’ agents.”)
Judge’s message falls on receptive ears. In November, the Federal Trade Commission ordered nine major retailers, wholesalers and suppliers of consumer goods — including Amazon — to provide data that could shed light on what it said, in a press release, “empty shelves and skyrocketing prices.” In February, the FBI and the Justice Department’s antitrust division announced an initiative to “deter, detect and prosecute individuals who would take advantage of supply chain disruptions to collude.”
On Thursday, Amazon tried to end an antitrust investigation in Europe by offering to change its practices in the European Union. The European Commission said Amazon promised to stop collecting non-public data on merchants it competed with and to give other sellers more access to valuable space on its website.
So why am I only half convinced? For starters, I find Judge’s solutions less convincing than her analysis of the problem. Her advice to consumers involves a lot of work. For example, she would like more people to buy food directly from farmers through community-supported farming groups. That’s where you get piles of kale every week that you don’t know what to do with. She says we need to “monitor the fees,” which includes “informing about how a particular intermediary is being compensated.” That’s a job worthy of a forensic accountant.
Her advice to the government, in addition to stronger antitrust enforcement, includes measures such as strengthening the US Postal Service as an alternative to Amazon “and perhaps even providing subsidies to small businesses when they use USPS to ship goods to customers.” .” She proposes that state and local governments should promote “local vesting” — investing in small-scale local businesses — in part by easing licensing rules and other regulations for them. Perhaps.
To review, a key benefit of buying direct is the human connection between buyer and seller that makes it possible. “Shared joy is not subject to the same rules that apply to consideration,” she writes. I imagine we share joy over farm produce or beaded bracelets, but not over most of what we buy – cereal, cars, cable TV.
My other reason for not fully accepting Judge’s argument is that I interviewed a number of economists who had more positive things to say about intermediaries. At Dartmouth College, economists Matthew Grant and Meredith Startz studied supply chains in Nigeria, which has a vibrant sales culture. in a new one working document, they believe that by providing logistics, intermediaries make it possible for more small-scale sellers to operate and compete with each other on price. So consumers are sometimes better off with more middlemen (and longer supply chains). In contrast, Startz said in an interview, “more direct sourcing means — all else equal — fewer, bigger companies” and thus less price competition.
I also spoke with Sharat Ganapati, an economist at Georgetown University who studied the rule of middlemen from 1992 to 2012, a period that saw the rise of Chinese exporters, the start of the North American Free Trade Agreement, and the info-tech revolution that is — at least in theory — easier for customers and suppliers to communicate directly without intermediaries.
“I thought I’d write a paper that said intermediaries don’t matter anymore,” he told me. Instead, he discovered two things: that it is still “incredibly difficult” to buy products from far away (for example, China) and sell them in the United States, and that customers value convenience. They appreciate the precious network of local distribution centers that allows Amazon to deliver a dizzying variety of products overnight.
As of 2012, the last year for which Ganapati could get reliable comparable data, the positives of intermediaries outweighed the negatives. He said there is preliminary evidence that in the decade since, the negatives may have outweighed the positives as intermediaries exercise their market power to increase their profits.
If true, that would bolster Judge’s argument in “Direct.” Right now, on intermediaries, I think I’m somewhere in the middle.
The readers write
As for your Monday newsletter on productivity, I’ve found in upcoming research that the mix of high- and low-wage industries will not disrupt productivity growth until the middle two quarters of 2020. There will be no effect in 2021-22. Instead, the sluggish productivity growth in 2021-22 will be driven by the resumption of the “redundant layoffs” that occurred during the recession.
Robert J. Gordon
Evanston, ill.
The writer is an economist at Northwestern University and a member of the Business Cycle Dating Committee of the National Bureau of Economic Research.
Quote of the day
“I’ve also come to realize that work, like many other activities, is done partly for reasons we can pinpoint – such as economic gain, companionship with colleagues, or better status – and partly as a game. In a game we just play. We act according to the world, and there is nothing more to say.”
— Richard Robb, “Deliberately: How We Choose What We Do” (2019)