Distribution of goods often involves chains of multiple intermediaries engaged in sequential buying and reselling. Why do these chains of intermediation exist, and what are their implications for consumers? We show that multi-intermediary chains arise in response to internal economies of scale in trade costs, suggesting that chains will be longer on average in developing countries. This mechanism can account for empirical patterns in wholesale firm size, prices, and markups that we document using original survey data on imported consumer goods in Nigeria. While policy wisdom often calls for shortening chains, we show that this has ambiguous welfare implications. Equilibrium distribution structures are not generally efficient, and policies and technologies that lead to shorter chains can, but will not necessarily benefit consumers, even when intermediaries hold market power. Instead, there is a fundamental welfare trade-off: shorter chains have lower marginal cost but also fewer sellers, which can reduce competition, product availability, and access to retailers in destination markets. We embed this insight in a quantifiable model of endogenous intermediation chains in a general geography. Estimating the model for distribution of Chinese-made apparel in Nigeria, we describe changes in chain structure and the resulting impacts on consumer welfare in response to counterfactual changes in regulation, e-commerce technologies, and transport infrastructure. We find that cutting out middlemen has heterogeneous impacts across locations, but often harms more remote consumers.
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