Are Middlemen Really Profit-Making Parasites?

We have a love-hate relationship with middlemen. We hate them — brokers or other intermediaries — because they can seem like profit-making parasites who needlessly insert themselves between customers and the people who actually make and do stuff. We try to get around middlemen by shopping at farmers’ markets, buying homemade goods straight from the makers on sites such as Etsy and directly supporting inventors and entrepreneurs by throwing money at them via GoFundMe.

But we also love middlemen because they make our lives easier. They take care of the logistics that we don’t want to be bothered with or simply can’t handle: locating suppliers, dickering with them over volume discounts, filling shipping containers, paying import licenses and port inspection fees.

There’s no better example of our love-hate relationship with middlemen than our feelings about Amazon. It’s huge and powerful, occupying the nexus between millions of customers and millions of suppliers. Antitrust authorities have it in their sights. And yet as recently as 2020, Amazon ranked No. 2 among America’s most trusted brands, after the U.S. Postal Service, according to Morning Consult.

I am approximately half convinced by a new book that’s negative on middlemen. It’s called “Direct: The Rise of the Middleman Economy and the Power of Going to the Source.” It’s by Kathryn Judge, a law professor at Columbia University. Judge is smart on both economics and the law. She clerked for Judge Richard Posner of the U.S. Court of Appeals for the Seventh Circuit and Justice Stephen Breyer of the Supreme Court. (She is married to the law professor Tim Wu, who is on leave from Columbia to serve as special assistant to President Biden for technology and competition policy.)

Judge acknowledges that middlemen can provide value. “Middlemen make the world as we know it possible,” she writes. “Thanks to middlemen, 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 couch” and so on.

But she worries that middlemen can make outsize profits by taking advantage of their indispensable position in transactions. And she says the distance they put between customers and suppliers can be outright unhealthy — such as when it’s hard 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, “breeds new sources of fragility, undermines accountability and leaves all of us more disconnected.”

Two of her strongest examples involve Amazon and the National Association of Realtors. She accuses Amazon of putting a competitor out of business by buying (and later closing) Quidsi, the parent of Diapers.com, and says “it may be necessary” for regulators to separate Amazon from Amazon Marketplace, its platform for third-party sellers. As for the Realtors’ association, she says it uses its chokehold on local multiple listing services to freeze out competitors that would save money for home buyers and home sellers by cutting agents’ fees.

(I asked both for comment. An Amazon spokeswoman wrote in an email: “We do not acquire companies just to shut them down. We worked hard for seven years to make Quidsi profitable before closing it.” As for splitting off Marketplace, she pointed me to a blog post saying that third-party sellers benefit from using Amazon’s delivery system. A National Association of Realtors spokesman sent a statement saying that under a rule issued in November, emphasizing existing policy, “compensations offered to buyer 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 buyer agents.”)

Judge’s message is falling on receptive ears. In November the Federal Trade Commission ordered nine large retailers, wholesalers and consumer goods suppliers — Amazon among them — to provide data that could shed light on what it called, in a news release, “empty shelves and sky-high prices.” In February the F.B.I. and the antitrust division of the Department of Justice announced an initiative to “deter, detect and prosecute those who would exploit supply chain disruptions to engage in collusive conduct.”

On Thursday, Amazon attempted to end an antitrust probe in Europe by offering to change its practices in the European Union. The European Commission said Amazon vowed to stop collecting nonpublic data about merchants that it competed with and to give other sellers more access to valuable space on its website.

So why am I only half convinced? For one thing, I find Judge’s solutions less persuasive than her analysis of the problem. Her advice for consumers involves a lot of work. For example, she’d like more people to buy food directly from farmers through community-supported-agriculture groups. That’s where you get heaps of kale every week that you can’t figure out what to do with. She says we should “follow the fees,” which includes “homing in on how a particular middleman is compensated.” That’s a job worthy of a forensic accountant.

Her advice for government, aside from more vigorous antitrust enforcement, includes such measures as fortifying the U.S. Postal Service as an alternative to Amazon “and perhaps even providing subsidies for small businesses when they use U.S.P.S. to send goods to customers.” She suggests that state and local governments should promote “locavesting” — investing in small-scale local businesses — in part by relaxing licensing rules and other regulations on them. Well, maybe.

To Judge, a key advantage of buying direct is the human connection between buyer and seller that it allows. “Shared joy is not subject to the same rules that govern a quid pro quo,” she writes. I can imagine sharing joy over farm produce or beaded bracelets but not for most of what we buy — cornflakes, cars, cable TV service.

My other reason for not buying Judge’s argument entirely is that I interviewed some economists who had more positive things to say about middlemen. At Dartmouth College, the economists Matthew Grant and Meredith Startz have studied supply chains in Nigeria, which has a vibrant selling culture. In a new working paper, they find that by taking care of logistics, middlemen make it possible for more small-scale sellers to operate and compete with one another on price. So consumers are sometimes better off when there are more middlemen (and longer supply chains). In contrast, Startz said in an interview, “more direct sourcing means — all else equal — fewer, larger firms” and hence 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 included the rise of Chinese exporters, the start of the North American Free Trade Agreement and the info-tech revolution that made it easier — at least in theory — for customers and suppliers to communicate directly without need for intermediaries.

“I thought I was going to write a paper saying middlemen don’t matter anymore,” he told me. Instead he found two things: that it’s still “incredibly difficult” to source products from far away (say, China) and sell them in the United States and that customers put a high premium on convenience. They value the costly network of local distribution centers that allows Amazon to deliver a dazzling variety of products overnight.

As of 2012, the last year for which Ganapati was able to get reliable comparable data, the positives of middlemen outweighed the negatives. He said there are preliminary indications that in the decade since, the negatives might have started to outweigh the positives because middlemen are exerting their market power to increase their profits.

If true, that would strengthen Judge’s argument in “Direct.” Right now, on middlemen, I guess I come down somewhere in the middle.

The Readers Write

Regarding your Monday newsletter on productivity, I have found in forthcoming research that the mix of high- and low-wage industries distorts productivity growth only in the middle two quarters of 2020. In 2021-22 there is no effect. Instead, the slow productivity growth in 2021-22 is caused by rehiring of the “excess layoffs” that occurred in 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 a lot of activities, is undertaken partly for reasons we can pinpoint — such as economic gain, camaraderie with colleagues or improved status — and partly as a game. In a game, we simply play. We act on the world, and there’s little more to be said.”

— Richard Robb, “Willful: How We Choose What We Do” (2019)

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