This paper presents a parameteric model that explains why individuals
choose to trade with an intermediary. This choice is based on a compar
ison of the gain from trading with the intermediary with the expected
gain from entering a matching process where individuals can choose to
be direct buyers, direct sellers or non-participants. The intermediary
provides a service by making the product more liquid by lowering the
probability of an unsuccessful trade. However, the individuals who cho
ose to remain direct traders are made worse off by the existence of th
e intermediary.