Information Externalities and Intermediaries in Frictional Search Markets

In frictional matching markets, buyers incur discrete inspection costs when assessing the suitability of goods on offer, and sellers incur discrete 'show' costs. This paper studies how intermediaries can help reduce these costs. Intermediaries, whose value derives from inventory, learning and memory, are shown to exist if goods are sufficiently heterogeneous. Intermediaries may either be firms that buy goods and hold inventory or brokers who search on behalf of their clients but do not buy or hold inventory. The parameter space, in terms of the ratio of inspection to show costs, naturally separates into two regions where firms exist versus where brokers exist.