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Intermediaries

Retail stores and wholesalers are examples of operations that cut transaction costs. Many people are surprised to learn that price swings are moderated by successful speculators, who are special types of intermediaries. Intermediaries specialize in reducing uncer­tainty and cutting the transaction costs of con­veying goods from original producers to the final users, often transforming the good to make it more compatible with ultimate users' demands.

Intermediaries are sometimes condemned as profiteers—villains who cause inflation, shortages, or other economic maladies. Like all intermediaries, profi­teers absorb risks and help move prices toward equilibrium. This reduces transaction costs and conveys goods to those who desire them most while boosting the incomes of original suppliers. In fact, intermediaries reduce opportunity costs to consumers, and speculators tend to reduce both the volatility of prices and net costs of products.

Have you ever paid more than you had to for anything? Your answer must be no if you be­have rationally. You might object that, say, buy­ing apples from a grocer costs more than buying them from an apple grower. But if you bought from a store, it must have charged less than if you had bought apples directly from an orchard, after considering information costs, travel, po­tential spoilage, and the time entailed in going to the orchard. Otherwise, you would have bought directly from the apple grower.

Similarly, monetary prices at convenience stores exceed those at supermarkets. However, after we adjust for greater accessibility because of the longer hours typical of convenience stores and the frequent extended waits at supermar­ket checkouts, customers of convenience stores must be paying less (after considering all trans­action costs) or they would buy elsewhere.

One important way in which intermediaries reduce transaction costs is by absorbing risk. Quality is often variable. Apples, for example, range from rotten to those that win prizes at county fairs. Orchard owners specialize in growing apples but may not be geared to assure top quality to every consumer of every apple. Another prob­lem is that an individual customer may buy ap­ples only at irregular intervals, while individual orchards have tons of apples available at some times, and none at others.

Apple wholesalers and grocers, however, purchase such large quantities that they are ac­customed to dealing with a mix of good and bad apples. They also sell to so many customers that no sale to any single final buyer is crucial. Thus, those ultimate producers and consumers who want to reduce risk can shift it to intermediaries who are more willing to bear risk. Transportation and information costs, time, and risk all contribute to transaction costs. No matter how hard you try, we doubt that you can come up with a single example where, after considering all transaction costs, at the time you bought something, you paid more than the low­est price possible for it. 2517 digits