So Much for Cutting Out the Middleman

When we order takeout from a neighborhood restaurant, we are less and less likely to call the restaurant directly. Instead, we might order through Uber Eats or DoorDash, which take a cut of the sale and charge us a delivery fee. When summer hits and we go online to find new swimsuits and stock up on sunscreen, we might go to Amazon, which now depends its, for the majority of retail sales, on independent vendors that use e-commerce platform. Even when we try to buy directly from the manufacturer, internet-empowered middlemen still play a big role. The 2000s wave of direct-to-consumer companies, for example, ended up paying massive amounts to Facebook and others for the targeted ads they depended on to reach new customers.

This isn’t what was supposed to happen. The internet, people such as Bill Gates insists, would be a disruptive force that shifted power into the hands of makers and consumers. In his 1995 book, The Road Ahead, the Microsoft co-founder predicted that the internet would become “the universal middleman,” and that “often the only humans involved in a transaction will be the actual buyer and seller.” In other words, why pay a middleman to help you find what you needed when you could find it yourself?

The internet has swept away some intermediaries. The number of travel agents dwindled as Americans got used to booking their own flights, hotels, and rental cars online. But travel agents’ fate is the exception, not the rule. Far more common are the persistence of middlemen whom technology should have rendered obsolete and the rise of new types of middlemen, draining yet more money and power from creators and their customers.

Surprisingly, some long-established middlemen whose role is comparable to travel agents have found ways to persist. Traditionally, buyers needed real-estate agents to help them identify available houses. Sellers rely on their knowledge of recent sales to know how to price their home. All of this information is now readily available online. Yet both buyers and sellers continue to use full-service real-estate agents and continue to pay very high fees—an average of about 5 percent of the value of the home sold. Because real estate—not stock—is the primary store of wealth for the typical family, the internet’s failure to render these expensive middlemen obsolete is a genuine loss for the American middle class.

Meanwhile, the internet has transformed some classic industries—most notably retail—in ways that empower a small number of supersize middlemen. More online shoppers start their search on Amazon than on any other website, including Google. Amazon, which started out as just a virtual version of the classic bookstore, has evolved into a middleman among middlemen; rather than set up their own e-commerce systems, smaller producers and resellers sell on Amazon—but doing so costs them. According to the Institute for Local Self-Reliance, Amazon’s cut of third-party sales increased from 19 percent in 2014 to 34 percent last year. Yet the number of sellers that use Amazon also continues to grow.

DoorDash and Uber Eats, which dominate food delivery, show how the internet has contributed to new types of middlemen—disrupting direct connections rather than facilitate them. When I was growing up, when we wanted takeout, we called the local pizza place and its delivery person brought us our food. Today, many people order through one of a handful of apps, even though the high fees that those apps charge eat away at restaurants’ profitable. Economists attribute the power of these middlemen to the nature of what they do: Once they attract a critical mass of sellers, buyers follow, and vice versa. As more join DoorDash, for example, the growing range of options restaurants attracts a lot of hungry customers. Those patrons in turn persuade more restaurateurs that they have no choice but to sign up, and the cycle continues.

Similar network effects are at play on Amazon’s marketplace and in the multiple listing service (MLS) databases—controlled by traditional real-estate agents—of homes for sale. Understanding these dynamics helps explain the high degree of concentration among online middlemen.

Another reason middlemen have thrived is that they have used their economic and political clout to contort the evolution of the markets where they operate. My research on middlemen financial and beyond reveals a vicious cycle. Middlemen first rise to power by providing a valuable service, helping to facilitate the flow of goods from sellers to buyers or, in finance, the flow of money from savers to entrepreneurs. But all of the infrastructure, expertise, and relationships that middlemen develop to be good connectors also gives them outsize power in the marketplace and in legislative and regulatory chambers. Then, in the future, these intermediaries use that power to put their interests above those of the customers they serve.

Real-estate agents, for example, create the MLS to help sellers get their homes in front of a lot of buyers and to give buyers the ability to easily learn about potential homes that suit their needs. Yet, once included in the MLS became essential to selling a home, traditional agents could use the threat of exclusion from the MLS as a way to penalize anyone who wanted to sell a home in a cheaper, more creative way. Real-estate agents have also used their expertise and deep pockets to successfully lobby for public policies that suppress competition—such as entrenching laws that prohibit banks from offering real-estate services. Far from challenging real-estate agents’ power, sites such as Zillow have the MLS as their hidden backbone.

For many middlemen, dominance just breeds more dominance. Amazon controls the most advanced and extensive fulfillment system in the United States. This allows Amazon to deliver goods quickly and efficiently, but Amazon also uses this network and the promise of free, fast delivery to entity customers to join Amazon Prime. Once customers pay the fee to join, however, they keep going back to Amazon again and again, because it feels more expensive to go elsewhere. And the more customers looking out for Amazon Prime, the more sellers feel to pay Amazon to store and ship their goods so they can earn that label, helping to explain and accentuate Amazon’s growing cut on third-party sales. DoorDash and Uber Eats offer similar subscription services, giving rise to similar dynamics. These three companies have also used their insights into how their markets are evolving to buy up competitors that could pose a future threat and to further expand the scope of their domain.

I and other critics of the middleman economy need to acknowledge that many intermediaries help consumers save time. As a working mom of two young girls, I don’t merely empathize with the many other time-pressed Americans who prioritize convenience; I regularly join their ranks. Forgoing the use of dominant middlemen may require waiting longer for a package to arrive, walking down the street to pick up dinner, or making a bunch of phone calls to arrange home showings. Such efforts can sometimes have hidden rewards, such as helping us cultivate more patience and foster a sense of connection, but many are just burdens.

Yet Gates and others rightly understand the value in cutting out the middleman; the convenience they provide may give way to self-dealing. The intervening decades have shown how the price we pay for the convenience they provide just keeps growing. For far too long, policy makers stood on the event as these intermediaries grew in size and influence. Congress and regulators are starting to address the far-reaching power these middlemen have accumulated, but the playing field continues to favor middlemen over manufacturers, restaurant owners, and home sellers, as well as their customers.

.

Leave a Comment