The Advantages & Disadvantages of Disintermediation

Disintermediation is a term for cutting out the intermediary. When you buy directly from a wholesale distributor, you are cutting out the retailer. When you buy financial investments via an online brokerage firm, you are cutting out the stockbroker. A loan directly from a bank is done without the loan broker. These kinds of purchasing behaviors might save you money, but they eliminate the value added by the retailer, stockbroker and loan broker.

An intermediary helps you make a purchase decision by providing market expertise, information and analysis on a filtered selection of best-in-class products. The intermediary also markets her services to attract you to the services she provides. For this, she gets paid a percentage of the sale or commission. Retail stores provide products for your hands-on inspection and salespeople to inform you of the qualities of the products you are considering. Stores spend money on maintaining inventory and a pleasant facility and advertise their promotions so you know when to buy at discounted prices. For these services, they mark up the wholesale price of their products. Brokers aggregate offers from the marketplace and present you with those that make the most sense to your personal situation, and they take a commission.

The main overall advantage of disintermediation is that it keeps price increases and predatory pricing under control in the economy. This is theoretically because the availability of wholesale distribution and do-it-yourself services allow the consumer to save money. For a manufacturer, selling directly to consumers cuts out the expense of paying sales representatives, allowing the manufacturer to gather consumer information directly and establish relationships with buyers of its products -- particularly appealing in the case of large volume buyers such as businesses.

One disadvantage of disintermediation for the consumer is that it might not save her that much money, but it does eliminate jobs as small local retailers go out of business because they can't compete with the prices offered by discounters and wholesalers. Another disadvantage for the consumer is the lack of personal help in making purchasing decisions. For the manufacturers and wholesalers, disintermediation adds the cost of marketing and requires employing a sales transaction staff and maintaining selling facilities. It also affects the number of services, such as brokers and agents, who might provide protection to their clients. The end result of disintermediation could even be a lack of transparency in markets, lessening of competition as brokers and retailers are eliminated and a return to predatory pricing.

The Internet provides consumers with a wide selection of products, services and information to make buying decisions without the help of intermediaries. E-commerce eliminates the expense of maintaining a physical storefront and might assist the consumer in saving money through lower prices, but delivery charges can nullify any savings. However, if convenience is added value, ordering online allows the consumer to shop at any hour without traveling to a store or office. In a way, the Internet service provider is an intermediary making these transactions available and charging fees for providing Internet access, so cost savings through Internet shopping might be negligible or non-existent. Like the addition of big-box warehouse or wholesale stores, disintermediation through the Internet has resulted in the elimination of many small local retailers.