Middlemen and the adverse selection problem

We demonstrate that the coexistence of an uncoordinated search market and a middleman market may alleviate adverse selection in the trade of goods of different quality. Inability to conduct trade penalizes sellers of low-quality goods disproportionately, encouraging them to trade via middlemen. A semi-separating equilibrium exists when a sufficient number of sellers of low-quality goods choose the middleman market to allow high-quality goods to be successfully traded in the search market. The result may explain why a search market can survive alongside a coordinated market, a phenomenon characteristic, for example, of markets for used cars, housing and labour.