Timothée Demont: timothee.demont[at]univ-amu.fr
Eva Raiber: eva.raiber[at]univ-amu.fr
Distribution of goods often involves chains of multiple intermediaries engaged in sequential buying and reselling. Why do such chains arise, and how will changes in their structure due to changes in policy or trade costs affect consumers? We show that internal economies of scale in trade costs naturally generate chains with multiple intermediaries, and that this suggests developing country markets are more likely to be served via long chains. Contrary to common wisdom, cutting middlemen out can, but does not necessarily, benefit consumers. Instead, there is a fundamental tradeoff between costs and entry that means even pure reductions in trade costs can have perverse effects. The proposed mechanism is simple, but can account for empirical patterns in wholesale firm size, prices and markups that we document using original survey data on imported consumer goods in Nigeria. We estimate a structural version of the model for distribution of Chinese-made apparel in Nigeria, and describe endogenous restructuring of chains and the resulting impacts on consumer welfare in response to counterfactual changes in regulation and e-commerce technologies. We find that cutting out middlemen has heterogeneous impacts across locations, but often harms more remote consumers.