Middleman

Who is a Middleman?

A middleman plays the role of an intermediary in a distribution or transaction chain who facilitates interaction between the involved parties. Middlemen specialize in performing crucial activities involved in the purchase and sale of goods in their flow from producers to the ultimate buyers. They typically do not produce anything but possess extensive knowledge of the market, thereby charging a commission or a fee for their services.

For example, a real estate agent with an established network of colleagues for contacting potential home buyers, in addition to a broad range of market information and advertising outlets. Wholesalers include the middlemen between manufacturers, producers, and retailers. The retailers themselves are the middlemen between wholesalers and the end customers.

Types of Middlemen

Middlemen can be classified into two categories, namely merchants and agents.

1. Merchants

Merchants, such as wholesalers and retailers, buy and re-sell their goods. They take ownership of inventory and bear the expense of storing and distributing the product. They make money by selling the goods at a higher price than its cost to them. The difference is called the “markup.”

Merchant middlemen range from a shopkeeper to a large multinational corporation with international operations. Larger middlemen may focus on a core competency, such as delivery, advertising, warehousing, or a particular market segment.

2. Agents

Agents, such as brokers or real estate agents, specialize in negotiations involved in transactions. They do not take ownership of what they are selling. Instead, they make money by charging a commission or a fee for facilitating a transaction.

For example, brokers act as intermediaries between investors and the securities exchange. They provide trading services, investment advice, and solutions to their clients and charge a brokerage fee in return.

Functions of Middlemen

Middlemen perform the following functions in a marketplace:

1. They provide valuable information and feedback to producers about consumer behavior, changing tastes and fashions, upcoming rival businesses, etc.
2. They enable manufacturers to concentrate on the primary function of production by handling the ancillary functions of warehousing, distribution, advertising, insurance, etc. They promote the goods to the consumers on behalf of the producers.
3. Middlemen like banks and other financial institutions render financial services to manufacturers.
4. They make the goods and services available to consumers at the right place, at the right time, and in the right quantity.
5. Buyers and sellers are often unwilling to assume the market risk for fear of a possible loss. It is the middlemen in the process chain who assume the risks of theft, perishability, and other potential hazards.

Importance of Middlemen

Intermediaries are important players in every market. Both consumers and producers stand to benefit from their services. In addition to constantly matching the supply and demand in the market, 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.

Buyers gain access to the right quantities of goods and services close to their homes through the intermediary channels. They benefit from other services of middlemen, such as advertising and delivery.

Disadvantages of Middlemen

Despite the many advantages that middlemen can offer, some people believe that middlemen do more harm than good and should be eliminated. As goods exchange hands from one middleman to the other, their prices inflate.

A higher price is charged at each junction to cover the cost of warehousing, insurance, transportation, advertising, etc. When a profit margin for each middleman is also factored in, consumers ultimately must bear the price of having intermediaries in the channel.

Additional Resources

Thank you for reading CFI’s guide to Middleman. To keep advancing your career, the additional CFI resources below will be useful:

• Financial Intermediary
• Commercial Insurance Broker
• Legal Counsel
• Arbitration
• See all valuation resources
• See all equities resources