This paper studies an intermediated market for a homogeneous good with middlemen who hold inventories of the good. Using a directed search approach, I investigate a steady state equilibrium. Under market frictions and competition, the ask price of middlemen includes a retail premium for the immediacy service to buyers and the bid price includes a wholesale premium charged to sellers for guaranteed sale. It is shown that the middlemen enhance the economy-wide efficiency, and that the bid-ask spread can be non-monotone in the middlemen’s inventory capacity. The simple model provided here has wide applicability and offers economic insights into many empirically relevant forms of middlemen, especially in the context of financial intermediaries, international trade and retail stores.

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