The market structures in trade intermediation with heterogeneous manufacturing firms

Abstract This paper examines how the market structure in the intermediary sector is determined, and how it affects the production decision, the export mode and the market structure in the manufacturing sector, as well as the aggregate price and the welfare in the economy. The intermediary market structure depends on the intermediary firms’ entry cost and intermediation cost, and a monopolistic intermediary sector emerges when both the entry cost and the intermediation cost are moderate. Compared to the competitive case, a monopolistic intermediary firm can charge a higher service fee and earn a positive rent, which yields a higher nominal income and expands the market size facing the manufacturers; however, it also lowers the average productivity of the surviving manufacturers. A monopolistic intermediary sector can generate a higher welfare if the positive effect brought by the higher nominal income dominates the negative effect resulting from the lower average productivity in the manufacturing sector.