The notion of electronic diffusion in the market is said to lead to disintermediation. The overall role of intermediaries depends on the relative relevance of the services offered to others services supposed to become obsolete. It has been argued that the introduction of information systems in distribution will eliminate the intermediaries due to the direct contact of traders with the on-line suppliers. This will ultimately reduce the price margins due to elimination of intermediaries calculated margins. A number of services have been presented by intermediaries that include inventory holding and provision of insurance of the systematic valuation risks, asymmetric reduction of information through an established reputation of producers by the intermediaries, and gathering and evaluation of information which they disperse to the society.
Intermediaries play important roles in the chain of distribution where the main feature is communication of the preferences by consumers to the manufacturer, and on the other hand the introduction of new products to consumers. Thus, there is a relationship that exists between the producers and intermediaries, which is a prime agency relation. The hidden intentions of intermediaries make them to increase the price of goods as they are always opportunistic. Different groups of agents are faced with the probabilities that define their characteristics of agency, and thus their compensations due to the different nature are conditioned by the agent. The type of agents makes the cost of agency rise as verification of the agent characteristics proves to be costly (Wigand, 1996).
The problem of hidden intentions is where the expected returns by the producer are based on the agents’ intentions. The minimum period of producer-agent relation is the one that proves to be profitable. Thus, the most probable way of the price reduction is through the elimination of agencies altogether. The producer has to perform the tasks that were being performed by the agents in order for them to reduce costs (Wigand, 1996). The effects of intermediaries are tangible for markets that are characterized by the arrival of buy and sell options due to the confrontation of uncertainty regarding the possibility of trading at a particular time.
The reason behind this is that buyers have to wait for the arrivals of their orders making the immediate execution of orders impossible. Thus the solutions to such situations are marked with participants at trading post without predetermined times (Flack, 2008). The arrival rate fluctuations are caused by the existence of intermediaries in the market which is characterized by double coincidence of timing. Thus, information system will reduce the margins of intermediation and the service for the underlying markets will thence become competitive. The price reduction will in turn attract new traders in the market as its access is affordable and efficient.
The market information provided by the agency is sometimes imperfect concerning the product’s quality making the goods heterogeneous due to asymmetric information prevailing in the market (Schmitz, 2000). This is in their efforts to create the reputation of the producer to the existing market. The market makers needs to be heterogeneous as this enables the buyers to connect the inter links characteristics at different times. The market needs to be well informed for it to avoid the loss of capital caused by the dynamics of equilibrium prices. The diffusion of information through technology does not alter the traders’ preferences as there are random orders arrivals. The traders enquire information directly from the producer which overcomes the asymmetry of information between buyers and sellers (Schmitz, 2000).
The elimination of intermediation can not be possible to all services rendered by these intermediaries. This is due to the key roles which are performed by these intermediaries. Increase in the electronic market participants in the market does not have the probability of trading with the same traders repeatedly, which reduce the pay offs to reputation establishments. Intermediaries are concerned with` the gathering, organization and evaluation at particular points to disperse them to the society. Thus their elimination is not possible as this service is a requirement.