The Middleman Economy

Middleman are those professionals who connect buyers

with sellers. These are the millions of people in jobs like sales
rep, real estate agent, financial advisor, headhunter, and
insurance or mortgage broker. The term middleman is an
informal word for an intermediary in a transaction or process
chain. A middleman, or intermediary, will facilitate interaction
between parties, typically for a commission or fee.
Intermediaries can be small companies or large corporations
with an international presence. Certain industries, either by
policy, infrastructure, or mandate, include an intermediate
layer of business.
Why middleman?

• They establish trust with both sides i.e. buyers and sellers.

• They contribute significantly to the GDP

• middlemen provide valuable feedback to the producers

about their market offering.

• By specializing in functions such as banking, warehousing,

transportation, underwriting, etc., they bring the economic
benefits of specialization and division of labor to the
market.
• They add value to the customers.
Value adding roles of the middleman:

 The Bridge Value added by spanning a gap by reducing physical,

temporal, or social distance.
 The Certifier The provider of reliable information for the buyer
that adds value by reducing quality uncertainty of the seller’s
quality.
 The Enforcer The middleman helps to keep all parties
accountable, honest and cooperative. Middleman is often a repeat
customer that holds vendors accountable for things like quality
and price.
 The Risk Bearer reduces fluctuations and other forms of
uncertainty, especially for risk-averse trading partners.
 The Concierge reduces hassles and helps clients make good
decisions in the face of information overload.
 The Insulator helps clients get what they want without the stigma
of being thought too greedy, self-promotional, or confrontational.
Types of middleman:
 The Bridge
The middleman act as a Bridge and promotes trade by reducing physical, social, or
temporal distance. The most effective ones spot opportunities between disconnected
individuals and groups. Bridges also understand that they must have something to offer
each side from the get-go.
Varied personal preferences that created gains from trade: whenever two people wanted
to trade, both would be better off.
When varied prices exist between the places then middleman engaged in simple
arbitrage and gain profits.
Middleman as a bridge widen the market size by connecting different markets and
people. These days, two-sided markets (sometimes called two-sided networks or two-
sided platforms) are everywhere because many of today’s Internet start-ups are
middlemen businesses of exactly this type: whether you’re talking about connecting
homeowners with guests (Airbnb) or drivers with fares (Uber). In this middleman act as a
bridges as two-sided market. An intermediary is setting prices for mediating between two
distinct groups of users (the two sides of the market), and crucially, “there’s a sense in
which one side cares about what happens on the other side.”
Middleman Help the people get more of what they wanted for
what they didn’t want as much, the middleman created value
and profited personally by capturing some of the value he
created.
Within a single nation, too, geographic differences have
always created gaps that were best filled by middlemen: it was
middlemen who brought grains and fruits and vegetables from
farms to cities and middlemen who took factory goods in the
opposite direction.
Middleman connect a pair of hungry entrepreneurs with a
team of deep-pocketed, experienced investors (Venture
Capitalists), simultaneously helping both sides and, indirectly,
himself.
Middleman reduce the temporal distance through creating
value for both the buyer and seller, taking the goods off
someone’s hands who wanted to get rid of it right away, and
selling it to somebody who needed it a few days later.
 The Certifier

Sellers often know more about the quality of what they’re

offering than buyers do, making buyers wary of the goods on
offer. By scouting for what buyers want, screening the options,
and staking their own reputations on what they buy and sell,
Certifiers provide value for both buyers and sellers. To profit from
this role, Certifiers must invest in their ability to tell the wheat
from the chaff and in a reputation for quality that pays off in the
long run.

Major roles of middleman as certifier includes:

• Scouting
• Screening
• Vouching
Through deep expertise and a hard-won reputation, the Certifier
saves buyers time while reducing their risk of being duped by a
seller.

Scouting means casting a wide net: going far and wide in search of
potential picks. Middleman scout all information related to the
product.

Screening involves use of know-how and analyse the information

gathered to provide correct piece of information to the buyers. So
that the buyers will not mislead. Most successful Certifiers,
however, do screen the people and goods they represent: in a
competitive market, they wouldn’t stay in business for long if they
neglected this crucial part of the job.

Vouching means staking middleman’s reputation on the quality of

what they ultimately present to their buyers. Better reputations
translate into higher revenues
Why Buying Direct Is Overrated?

most sellers know more about the quality of what they’re selling
than most buyers do. This imbalance between what the seller
knows and what the buyer knows (what economists call an
“asymmetry of information”) leads to a series of problems. For
starters, sellers might try cheating prospective buyers, charging
more than the item is actually worth given its actual quality.
Buyers, aware of this possibility, might therefore be wary of
buying a used anything from someone they don’t know, or they
might be unwilling to pay the price asked for.

Middleman play a vital role here. They not only have the
expertise to judge quality, but they can vouch for it with their
reputation. They also protect the buyers from higher prices.
Middleman as a Certifier:
Definition: A middleman acts as a certifier by verifying the quality,
authenticity, or compliance of products or services.
Examples:
Food Industry: Middlemen certify that products meet certain
standards (e.g., organic, fair trade) through labels or seals.
Education: Middlemen certify the completion of courses or
programs, indicating a certain level of knowledge or skill.
Benefits:
Provides assurance to buyers regarding the quality or
authenticity of products.
Helps differentiate products in the market by highlighting their
compliance with specific standards.
Challenges:
Ensuring consistency and accuracy in certification processes.
Addressing fraudulent certification practices that undermine
trust in the system.
 The Enforcer
Keeping Everyone Honest

The Enforcer makes sure buyers and sellers put forth full
effort, cooperate, and stay honest. When they run two-
sided networks, where the behavior of one side can have
positive or negative effects on the other side, Enforcers
understand the importance of designing and upholding
rules that will create a more valuable network. Therefore,
they watch over their partners’ dealings, parlay their
relationships, and establish shared standards for good
behavior.
Why services require enforcers?

For selling goods enforcers are not required. Certifier is enough.

Hidden information about sellers, as Certifiers do, won’t protect
buyers from shirking and cheating, problems that can come up
after buyers sign on the dotted line. These problems of shirking
and cheating, variously called moral hazard, post contractual
opportunism, or hidden action —are especially acute when a
player’s actions are hidden and when buyers and sellers don’t
have an ongoing relationship.

Certifiers protect against the pre-contractual problems of hidden

information, Enforcers protect against the post-contractual
pitfalls of hidden action.
Playing the Watchdog role:

The most basic way Enforcers keep people honest is by watching

over buyers or sellers in ways that it would be too costly or even
impossible for them to do on their own. Group of researchers
found that the mere picture of a pair of eyes made participants
more honest. Middleman are like a stand-in for the small-town
gossip networks that keep neighbors civil: able to observe the
actions of the buyers and sellers they work with, especially over a
long period of time, Enforcers can deter bad behavior, reward
honest dealings, and thereby make buyers and sellers less wary of
dealing with each other.

When watchdogs broadly share information about past behavior,

research shows, buyers and sellers enjoy higher returns for doing
good work: watchdogs amplify good reputations.
The vast majority of middlemen are neither perfect
watchdogs nor parasitic ones: they’re on a continuum from
strong to weak enforcement, and many could do better.

A strong enforcer serves as a pretty powerful watchdog in

protecting buyers from unscrupulous and incompetent
sellers through feedback system and fraud department

An opposite is weak enforcer who cant protect the

customers from the unscrupulous and incompetent sellers.
• Middleman as an Enforcer:
• Definition: A middleman acts as an enforcer by ensuring that
transactions adhere to rules, regulations, or agreements.
• Examples:
– Real Estate: Escrow agents ensure that the terms of a sale are
met before transferring funds, enforcing the contract.
– Financial Services: Middlemen enforce compliance with
financial regulations to prevent fraud and ensure fair practices.
• Benefits:
– Helps maintain trust and transparency in transactions.
– Reduces the risk of disputes by ensuring parties adhere to
agreed-upon terms.
• Challenges:
– Balancing enforcement with customer service to avoid
conflicts.
– Keeping up-to-date with changing regulations and laws.
 The Risk Bearer
(Reducing Uncertainty)
From banks and insurance companies to wholesalers, some
companies earn a premium for bearing risk. By building
diversified portfolios, they’re better able to weather
volatility than their trading partners. The same principle
holds true for nonobvious middlemen, from gallerists and
venture capitalists to Internet platforms that deliver on-
demand services: all are better able than their trading
partners to bear risk. One key to being an admirable Risk
Bearer: being able to discern internal from external risk,
avoiding the former risk while embracing the latter.
 The Risk Bearer
(Reducing Uncertainty)
Every business person deals with risk, but middlemen are in
a unique position to profit from it.

From banks and insurance companies to wholesalers, some

companies earn a premium for bearing risk. By building
diversified portfolios, they’re better able to weather
volatility than their trading partners. The same principle
holds true for nonobvious middlemen, from gallerists and
venture capitalists to Internet platforms that deliver on-
demand services: all are better able than their trading
partners to bear risk. One key to being an admirable Risk
Bearer: being able to discern internal from external risk,
avoiding the former risk while embracing the latter.
As a risk bearer the middleman should understand and forecast
the risks associated with the business. “Even when times are
tough, it’s to the Company’s benefit to try to project an image of
success”.

Though middlemen’s work is risky, middlemen are usually in a

better position to bear risk than their trading partners are. That’s
because they deal with many more buyers and sellers than the
buyers and sellers do, which gives them more ways to diversify
away some of the risk.

Successful middlemen, whose livelihood depends on sharing risk

and providing proper incentives to buyers and sellers, also
understand the problem.
Risk classification—or grouping risks based on their costs—
is such a fundamental part of the business that, if it’s not
done right, it can lead to dire consequences.

To profit from risk, middlemen, like successful insurers,

must analyse these two types of risk:
• Internal risk: (It is due to characteristics or actions of a
trading partner other wise internal risks are risks caused
by asymmetric information i.e adverse selection and
moral hazards)
• External risk: it is also known as exogenous risk, which
cannot be controlled. It must be diversified. A
middleman should analyse whether existing laws permit
them to go further.
• Middleman as a Risk Bearer:
• Definition: A middleman assumes some degree of risk in transactions,
such as inventory management, market fluctuations, or payment
defaults.
• Examples:
– Insurance: Insurers bear the risk of loss in exchange for premiums,
providing financial protection to policyholders.
– Supply Chain: Distributors bear the risk of holding inventory until it is
sold, absorbing losses if demand decreases.
• Benefits:
– Reduces the risk exposure of buyers and sellers, allowing them to
focus on their core activities.
– Enables transactions that would be too risky for individual parties to
undertake alone.
• Challenges:
– Managing and mitigating risks effectively to avoid significant losses.
– Ensuring profitability while bearing risks, which may require
sophisticated risk management strategies.
 THE CONCIERGE
Making Life Easier
Middleman reduces hassles and helps clients make good decisions in the
face of information overload. These days consumers can perform many
traditional middleman tasks themselves. Yet savvy consumers
understand that just because we can do something ourselves doesn’t
mean we should. Middlemen who play the Concierge role can provide
value for such consumers, but only if they understand what customers
really need from them and price their services with consumers’ ever-
changing alternatives in mind.

Many travel agents are surviving by implementing the concierge role and
changing their pricing system. They listen to what their clients want, and
ninety percent of what they do is customized. they will sell a brochure
trip from a tour company, but really what they excel in is creating the
experience,” they says and begins reeling off a list of tailor-made trips
that agency has designed
Why, in our advanced technological times, does the modern day clients still
need a concierge?

In advanced technological era clients are well informed in many ways. Like
many people who do their own research online, they wanted reassurance that
what he’d read online was right, or needed someone to put all the pieces
together. So that middleman could help them plan a better way than they
could on his own and that she could do so faster, too.
The vast volume of information available to consumers is actually making the
Concierge role more important than ever. There will
only be more websites, more reviews, more tweets, and more maps and
photos and videos and countless other pieces of information to look at and
weigh as we make decisions. That presents both a challenge and an
opportunity for computer scientists and software engineers—and for
middlemen. Middleman charge fee for providing the services as concierge.
Now they are following discount commission method. Middleman makes work
of the parties more simple by providing transparency and efficiency.
Middlemen as Concierges:
Definition: Concierge middlemen provide personalized services to customers, acting as
intermediaries who offer convenience, customization, and exceptional service.
Role and Function:
Provide personalized assistance: They offer tailored solutions and guidance to meet
customer needs.
Enhance customer experience: By providing additional services, they improve
customer satisfaction and loyalty.
Offer convenience: Concierges save customers time and effort by handling various
tasks on their behalf.
Facilitate decision-making: They provide information and recommendations to help
customers make informed choices.
Benefits for Businesses:
Differentiation: Concierge services set businesses apart by offering unique and
personalized experiences.
Increased customer loyalty: Exceptional service leads to repeat business and positive
word-of-mouth.
Higher revenues: Additional services and personalized offerings can lead to
increased sales and higher customer spending.
Challenges:
Cost: Providing personalized services can be expensive.
Training: Concierges need to be well-trained and knowledgeable to offer quality
service.
Scalability: Maintaining high service standards while expanding can be challenging.
 The Insulator
Taking the heat

Usually middlemen bring people together, but sometimes people who

already know each other are better off communicating through a
middleman who insulates them from blame. This happens when speaking
directly and on your own behalf makes you seem too greedy, self-
promotional, or confrontational. An effective Insulator can take the heat in
such situations—and can also transform what might appear as a client’s
selfishness into the Insulator’s altruism.

Middleman diffuses tensions between the parties in the business

(generally buyer and seller) by letting his clients blow off steam with him.
When the middleman convey the clients’ concern to other client in the
transactions, it is the middleman who takes the heat for being the bad
guy.
• Middlemen as Insulators:
• Definition: Insulator middlemen act as a buffer between the
producer and the consumer, protecting either party from the
risks or complexities involved in the transaction.
• Role and Function:
– Risk management: They absorb or mitigate risks associated
with the transaction, such as price fluctuations or quality
issues.
– Simplify transactions: Insulators streamline the buying
process by handling negotiations, contracts, and logistics.
– Ensure compliance: They ensure that transactions comply
with regulations and standards, reducing legal and
regulatory risks.
• Examples: Insurance brokers , Export agents
• Benefits for Businesses:
– Risk reduction: Insulators protect businesses from financial and legal
risks.
– Focus on core activities: Businesses can concentrate on their core
operations while insulators handle transactional aspects.
– Access to expertise: Insulators provide specialized knowledge and
resources, enhancing efficiency and effectiveness.
• Challenges:
– Trust and transparency: Building trust between parties and ensuring
transparency in transactions can be challenging.
– Cost: Insulating services come at a cost, which businesses need to
consider in their pricing and operations.
– Dependency: Over-reliance on insulators can limit a business's
flexibility and control over its operations.