Monday, February 1, 2016

Should we eliminate the middlemen?

Forbes answers with a resounding "no!" --because they move assets to higher-valued uses.
Uber and Airbnb do not own cars and hotels. Rather, they are profiting from what they know about consumers and dead capital. Before the rise of Uber there were many people who needed rides but were unable to efficiently contact nearby strangers who would be willing to give them a ride in exchange for a fee. In a similar fashion, Airbnb connects travelers in strange cities to the hundreds of nearby homeowners who have spare bedrooms. Before companies like Airbnb travelers faced significant costs if they wanted to spend their holiday living in a native’s spare room. In almost every circumstance, booking a hotel or hostel room was more cost-effective and reliable. Now, finding people who want to give you a place to sleep is just a few clicks away.

11 comments:

  1. I believe there are both pros and cons to middlemen. There are industries in which regulation is necessary in order to ensure safety, prevent injury or illness, and there are other industries that could be deregulated or at least a reduction in regulation in order to allow for more free enterprise. In the example of Uber, who puts those who need rides in touch with those who are willing to give rides for a fee, shouldn’t those drivers be required to follow the same rules as taxi drivers? For the most part, it is simply people willing to use their personal vehicle to transport others from one location to another for a fee. My questions with regard to this practice include: Do they have adequate insurance should they be involved in an accident? Should they be collecting public utility tax? Do they have the appropriate driver’s license for transporting passengers? I realize that Uber, is just the middleman and not the employer of the drivers, but in an industry that is regulated for the safety and well-being of paying passengers I think that it is unfair for taxi drivers and the companies they work for to be regulated and for others attempting to provide the same service not to be regulated in the same way. Of course the fee for services is going to be lower when the costs associated with meeting regulation requirements are not included in the fees. I think that change is needed. I don’t think that passenger transportation should be completely deregulated, but the playing field can be leveled some from both ends.

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    1. This is terrible, please use your brain.

      If I, as a consumer, am willing to assume the risk that, gasp, my Uber driver may not have a license for transporting passengers, shouldn't I be able to avoid the premium associated with said license? That's a trade I'm willing to make.

      Blake

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    2. Since this is a risk you are willing to take, do not plan to spend time in court suing somebody should you be injured - Uber driver becomes killer suspect this week in Kalamazoo MI.

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  2. While I found this article and interesting and compelling read, I am not fully in support of the middleman. The article tells a good story about s POW named Radford and his experience with the middlemen in his prison camp. This is a good example, but for the vast majority of us, we are not a POW forced to trade for goods. I look at middlemen from the perspective of cost to the buyer and seller. Specifically I look at the beer industry and the laws that govern distribution of beer.

    Following prohibition, the government instilled the system that most large breweries are subject to today with distributors selling and delivering their beer for them. This was originally done to prevent monopolies in the beer world and it also created a system where beer could be taxed three times. Once in the producer, then on the distributor, then finally in the retailer (Reis, 2014). In reality, all it has done is drive up the cost of beer for the end consumer and make the distributer richer.

    In many states, there are new laws which allow smaller Brewers to self distribute their product. This has two benefits. First, the Brewer keeps a larger share of the revenue and second, it leads to a more pure free market economy on the price of beer.

    Since the Brewers is able to distribute, then can name their own price. If they price it too high, they will not sell as much product. If they price it too low, they will sell more (assuming it's a good beer) but their profits will be less. For a startup brewery, this is critical as it gives them more working capital to be able to grow and expand operations.

    So for me, I say let's examine each industry and decide whether or not we really need the middleman. For beer, I believe it's an overwhelming no, but. The case of Uber, I say maybe.

    Reference:

    Reis, Mike (January 8, 2014) Beer Issues: What's Up With The Three Tier System? Retrieved on February 11, 2016 from: http://drinks.seriouseats.com/2014/01/craft-beer-three-tier-system-pros-cons-distributor-retailer-debate.html

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  3. It seems as though we now live in a world that makes it difficult to avoid the middlemen. Every industry is moving towards online growth. Some of the most relevant and profitable Internet companies are essentially the "middleman". Amazon, for example, has become the middleman for both individual sellers, as well as larger companies. Amazon is able to sell these items in a way that is more profitable for sellers and less costly to consumers. Though I will not delve into the intricacies of the market, however Amazon is able to do this, why not let them? This middle man saves money for the consumers and delivers profits to the sellers while it follows set regulations. We could also use the example of Ebay. This company creates regulations of its own to control the sellers in creating fair, but profitable prices. It gives the option of a "buy it now" price, but that price must be a certain percentage greater than the listed bid price. Giving both sellers and consumers the freedom to begin listing/bidding at a price they find appropriate, but creating regulations that will remain reasonable and profitable.

    Krakovsky, Marina. 9 September 2015. In defense of the middleman. Accessed 14 February 2016 at:
    http://www.fastcompany.com/3049277/tech-forecast/in-defense-of-the-middleman

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  4. The examples of Uber and Airbnb given in the above topic in “Should we eliminate the middlemen” seem to be the trendy topic of discussion lately and it begs the questions asked of “should we eliminate the middlemen.” I for one do not see a problem with Uber and Airbnb and their services provided. Uber is a service, if there is a paying population out there willing to pay for the services, why should they not be allowed to? Same with Airbnb, if a person is willing to rent their place to a paying stranger, why are they not allowed to? In both cases, the middlemen, Uber drivers and Airbnb property owners are taking on a risk, but this is the risk that a middleman takes in order to profit. As Britalena Liebers pointed out in her post, Amazon serves as the middlemen for both the sellers and buyers and has become a multibillion dollar cash cow in doing so. They provide a service to get a sellers product to the masses and make the process of selling and receiving easier for all parties.
    I work in the insurance industry as an insurance broker. We are the middlemen to over 30 different companies and thousands of clients. We help insured’s and potential insured’s find insurance that they may need whether it be based on price or company rating/stature. In doing so, we generate revenue for those companies and also help provide a service for the insured. When you subtract the large independent insurance companies like Allstate, State Farm, Liberty Mutual and Geico, whom we do not work with, the need for people being able to find affordable insurance with other less advertised companies becomes harder. This is where we as the middleman come in. Much like Uber, if I want to find transportation while still in a restaurant and do not want to wave down a cab in cold weather, I have the luxury. I think business has not become strongly reliant on middle men, when buying a cell phone, we often go to the cellular provider rather than buying from Google, Apple and LG directly. Middlemen have long been used and I think they will continue to be, if done efficiently and effectively, I personally do not have a problem with the use of a middleman.

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  5. Middlemen are very important in business. “Intermediaries are very important players in the market. Both the consumers and producers gain immensely from the roles of middlemen, who ensure that there is a seamless flow of goods in the market by matching supply and demand” (Adams). Without the middlemen, the consumers don’t have as many options to buy from or options to buy on the internet and in person. With the middlemen there are more people involved but each level is an important part. It gives jobs to more people, as well as making it easier to sell the products many different ways. Consumers are able to have a choice in where they buy from and producers can sell through many different avenues.

    Can you imagine no middlemen? I personally shop on Amazon and compare prices because we have the option. Generally I find a way to purchase it from the cheapest place. After the realization of just how many middlemen there are, I find it intriguing to think about how different it would be without them.

    Adams, D. (n.d.). What Is the Middleman in Marketing? Retrieved February 17, 2016, from http://smallbusiness.chron.com/middleman-marketing-21577.html

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  6. As stated by Froeb, “wealth is created when assets move from lower- to higher-valued uses”. In many of the cases mentioned here as well as in the Forbes article, it is clear that these companies are benefiting from assets being maximized. Cars and houses (or apartments) are assets to our everyday lives, but in these situations they are being utilized in high valued ways that were not considered before.

    On the other hand, I think it definitely depends on the specific industry. As far as distribution channels go, it makes sense that eliminating the middleman would almost always result in higher-valued assets. “Eliminating the middleman usually creates a win-win for the seller and buyer from a money perspective. Each step in a traditional distribution process involves a trade buyer adding a markup to his costs… By getting rid of the middleman's markups, you can offer the customer a lower price while getting higher gross profits for yourself” (Kokemuller, 2016). In these situations there would be additional buyer surplus and seller surplus, because these profits are not being eaten up by middlemen. The seller can offer the product at a slightly higher price than it would to the middleman, yet this price will still be considerably lower than the buyer’s top dollar. This implies the total gains from the trade might be lower than if the middleman was involved, but the surplus to the buyer and seller would be greater than if the middleman was involved.

    Kokemuller, Neil. (2015) The advantages of eliminating the middleman. Retrieved from http://yourbusiness.azcentral.com/advantages-eliminating-middleman-13463.html

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    1. The value of the middleman is not dependent upon the specific industry. It could be dependent on the specific firm, division, or even product. It depends on the assets that the middleman owns, how much it would cost you to acquire or build those assets, and how much value those assets contribute to your firm, division, or product. For example, an apple farmer can sell $2/lb worth of product at a roadside stand near his property for $5/lb. That's $3/lb, a 150% margin! But, he can sell 1,000x more of his product to a produce distributor for $3/lb. The distributor has built a network of grocery buyers (asset) that the farmer has not. The farmer could try and build the network herself, but does not want to take on the risk and opportunity cost of doing so. The farmer would prefer to specialize in the area she best understands: growing apples.

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  7. Dr. Froeb,

    I have to say that I agree with keeping the middlemen – in this case, Uber and Airbnb – because of the positive role they play in positive wealth creation. The services they facilitate are obviously in demand and the resources they help to facilitate are very willing participants – not withstanding some labor-related speedbumps.

    These companies aren’t perfect, but since I don’t know if there is such a thing, for now we can trust that the public policy aspects of their respective businesses will be smoothed-out in due time since the public has a demand for the services they facilitate.

    If consumers sour on these companies over time, it’s a safe bet that they will be replaced by something even more innovative as long as consumers and the owners of vehicles and housing find mutual value in transacting.

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