The middleman as a cost reducer
Middlemen provide buyers and sellers information at a lower cost and arrange trades between them. Many people think middlemen just add to the buyer’s expense without performing a useful function. However, because of transaction costs, without middlemen, many trades would never happen (nor would the gains from them be realized). An auto dealer, for example, is a middleman. An auto dealer helps both the manufacturer and the buyer. The dealer helps buyers by maintaining an inventory of vehicles for them to choose from. Knowledgeable salespeople hired by the dealer help car shoppers quickly learn about the vehicles they’re interested in and the pros and cons of each. Car buyers also like to know that a local dealer will honor the manufacturer’s warranty and provide parts and service for the car. The dealer helps manufacturers by handling tasks like these so they can concentrate on designing and making better cars.
Grocers are also middlemen. Each of us could deal with farmers directly to buy our food-probably at a lower monetary cost. But that would have a high opportunity cost. Finding and dealing with different farmers for every product we wanted to buy would take a lot of time. Alternatively, we could form consumer cooperatives, banding together to eliminate the middleman, using our own warehouses and our own volunteer labor to order, receive, display, distribute, and collect payment for the food. In fact, some cooperatives like this do exist. But most people prefer instead to pay a grocer to provide all of the goods they want rather than trying to trade with different farmers.
Stockbrokers, realtors, publishers, and merchants of all sorts are other kinds of middlemen. For a fee, they reduce transaction costs for both buyers and sellers. By making exchanges cheaper and more convenient, middlemen cause more efficient trades to happen. In so doing, they themselves create value.