Flattening Supply Chains: When do Technology Improvements lead to Disintermediation?

Abstract

In the digital economy, technological innovations make it cheaper to produce high-quality content. For example, generative AI tools reduce costs for creators who develop content to be distributed online, but can also reduce production costs for the users who consume that content. These innovations can thus lead to disintermediation, since consumers may choose to use these technologies directly, bypassing intermediaries. To investigate when technological improvements lead to disintermediation, we study a game with an intermediary, suppliers of a production technology, and consumers. First, we show disintermediation occurs whenever production costs are too high or too low. We then investigate the consequences of disintermediation for welfare and content quality at equilibrium. While the intermediary is welfare-improving, the intermediary extracts all gains to social welfare and its presence can raise or lower content quality. We further analyze how disintermediation is affected by the level of competition between suppliers and the intermediary's fee structure. More broadly, our results take a step towards assessing how production technology innovations affect the survival of intermediaries and impact the digital economy.