What, indeed, is the importance of middlemen in the world of business? Middlemen, by definition, are an added layer within a commercial process that may or may not facilitate a transaction at the most cost-effective level. Brokers are middlemen in that they act to try and bring consumers of stocks...
What, indeed, is the importance of middlemen in the world of business? Middlemen, by definition, are an added layer within a commercial process that may or may not facilitate a transaction at the most cost-effective level. Brokers are middlemen in that they act to try and bring consumers of stocks together with the companies seeking to sell shares. For this service, which can be conducted for the benefit of the buyer, the seller, or both, the broker or middleman receives a commission, usually a percentage of the value of the transaction.
Brokers or middlemen exist in many areas of commerce. Food brokers, for example, seek to find buyers for a wholesaler's inventory of a certain category of food. Conversely, they help the buyer to identify the most cost-effective option within the wholesale community. Department or grocery stores are middlemen in that they buy food and other items from farmers and manufacturers, store and display these goods for the benefit of consumers, and manage the transaction, keeping a percentage of the value of the sale while compensating the manufacturer or supplier.
As this is the role of middlemen, one can understand why some wholesalers market their goods as being a better option for the consumer by promising to "eliminate the middleman." What this means is that wholesalers or manufacturers are communicating directly to the public that the latter can buy products for less money because there is no middleman involved to whom a commission must be paid for facilitating the transaction. No commission or costs associated with middlemen means lower prices for the consumers, at least in theory.
While consumers can avoid the cost of middlemen, nevertheless, most choose that option. Middlemen, especially those who posit themselves as guardians of the consumer procurement process, can help consumers to identify the best product for the consumers' personal needs. Honest brokers can steer consumers away from disreputable or unreliable suppliers or, conversely, can warn supplies away from potential consumers with records of delinquent payments to their suppliers. With reference, again, to the world of stocks, brokers walk a very fine line between ethical and unethical conduct on a daily basis. Stock brokers work off of a commission calculated on the basis of the value of stocks they transfer from the issuer to the buyer. The broker's incentive, therefore, is to facilitate the exchange of stocks for cash as often and in as great a volume as possible. The more such transactions, the greater the commissions accruing to the broker. Consequently, it is not unusual for consumers to be sold questionable stocks by persuasive brokers more interested in their commissions than in the welfare of their clients.
Middlemen are an integral part of many commercial transactions. Whether they are needed on any given transaction has to be determined on a case-by-case basis. They can serve a useful purpose in bringing together parties with a common interest in concluding a transaction. They can also, though, subvert the process by secretly conspiring with one of the parties to the transaction to finalize a deal disadvantageous to the other party in the equation. Caveat emptor.