Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
is the removal of intermediaries
An intermediary is a third party that offers intermediation services between two trading parties. The intermediary acts as a conduit for goods or services offered by a supplier to a consumer...
in a supply chain
A supply chain is a system of organizations, people, technology, activities, information and resources involved in moving a product or service from supplier to customer. Supply chain activities transform natural resources, raw materials and components into a finished product that is delivered to...
: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate (such as a distributor
Product distribution is one of the four elements of the marketing mix. An organization or set of organizations involved in the process of making a product or service available for use or consumption by a consumer or business user.The other three parts of the marketing mix are product, pricing,...
, wholesaler, broker, or agent
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
), companies may now deal with every customer directly, for example via the Internet. One important factor is a drop in the cost of servicing customers directly.
Disintermediation initiated by consumers is often the result of high market transparency, in that buyers are aware of supply prices direct from the manufacturer. Buyers bypass the middlemen (wholesalers and retailers) in order to buy directly from the manufacturer and thereby pay less. Buyers can alternatively elect to purchase from wholesalers. Often, a business-to-consumer electronic commerce (B2C) company functions as the bridge between buyer and manufacturer.
To illustrate, a typical B2C supply chain is composed of four or five entities (in order):
When someone gets characterised by their role as buyer of certain assets, the term "buyer" gets new meaning:A "buyer" or merchandiser is a person who purchases finished goods, typically for resale, for a firm, government, or organization...
It has been argued that the Internet modifies the supply chain due to market transparency:
The term was originally applied to the bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
ing industry in about 1967: disintermediation referred to consumers investing directly in securities (government and private bonds, and stocks) rather than leaving their money in savings accounts, then later to borrowers going to the capital markets rather than to banks.(OED, Google News Archive) The original cause was a US government regulation (Regulation Q
Regulation Q is Title 12, part 217 of the United States Code of Federal Regulations. It prohibits banks from paying interest on demand deposits in accordance with Section 11 of the Glass–Steagall Act ....
) which limited the interest rate paid on interest bearing accounts that were insured by the Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
It was later applied more generally to "cutting out the middleman" in commerce, though the financial meaning remained predominant. Only in the late 1990s did it become widely popularized.
A computer is a programmable machine designed to sequentially and automatically carry out a sequence of arithmetic or logical operations. The particular sequence of operations can be changed readily, allowing the computer to solve more than one kind of problem...
hardware and software
- Travel agencies
A travel agency is a retail business that sells travel related products and services to customers on behalf of suppliers such as airlines, car rentals, cruise lines, hotels, railways, sightseeing tours and package holidays that combine several products...
- Bookstores and music
Music is an art form whose medium is sound and silence. Its common elements are pitch , rhythm , dynamics, and the sonic qualities of timbre and texture...
- Stock Purchasing
Stocks are devices used in the medieval and colonial American times as a form of physical punishment involving public humiliation. The stocks partially immobilized its victims and they were often exposed in a public place such as the site of a market to the scorn of those who passed by...
Still in progress (due to legal or structural obstacles)
- Alcoholic beverage
An alcoholic beverage is a drink containing ethanol, commonly known as alcohol. Alcoholic beverages are divided into three general classes: beers, wines, and spirits. They are legally consumed in most countries, and over 100 countries have laws regulating their production, sale, and consumption...
- Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
A real estate market is social. Buyers and sellers communicate to discover information and negotiate to exchange goods or services. Internet transparency is letting home buyers view Residential and Commercial MLS, FSBO listings on their own. It has reduced home buyers search costs, and given them access to multiple new product options to choose from when going into a real estate transaction. Also sellers have found new tools and services to attract home buyers and sell their houses, they can now leverage Internet market tools that are intended to increase the efficacy of transactional requirements.
This transparency has made it difficult for Real Estate Agents, Appraisers, Lenders, etc. to collect the fees - tipping the balance of power towards the consumers. By opening access to information outside of the Brokers/Lawyers control, buyers and sellers now gain economic benefits that would be otherwise be received by market intermediaries or inappropriately distributed among the smart and connected deal makers of the financial world.
- Prime brokerage
Prime brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a netted basis and achieve an absolute return...
for hedge fund
A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
- Health Care - due to developments in eHealth
eHealth is a relatively recent term for healthcare practice supported by electronic processes and communication, dating back to at least 1999...
and specifically Consumer Health Informatics
Consumer Health Informatics helps bridge the gap between patients and health resources. The Kaiser model is an example of allowing patients to remotely communicate with their physicians or other healthcare professionals....
- Video rental and distribution
Failed and became niche ancillary services
Furniture is the mass noun for the movable objects intended to support various human activities such as seating and sleeping in beds, to hold objects at a convenient height for work using horizontal surfaces above the ground, or to store things...
- Pet supplies (especially dog food
Dog food refers to food specifically intended for consumption by dogs. Though technically omnivorous, dogs exhibit a natural carnivorous bias, have sharp, pointy teeth, and have short gastrointestinal tracts better suited for the consumption of meat...
A prime example of disintermediation is Dell, Inc., which sells many of its systems direct to the consumer — thus bypassing traditional retail chains. In the non-Internet world, disintermediation has been an important strategy for many big box retailers like Walmart, which attempt to reduce prices by reducing the number of intermediaries between the supplier and the buyer. Disintermediation is also closely associated with the idea of just in time manufacturing, as the removal of the need for inventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
removes one function of an intermediary.
The existence of laws which discourage disintermediation has been cited as a reason for the poor economic performance of Japan
Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
in the 1990s.
However, Internet-related disintermediation occurred less frequently than many expected during the dot com boom. Retailers and wholesalers provide essential functions such as the extension of credit, aggregation of products from different suppliers, and processing of returns. In addition, shipping goods to and from the manufacturer can in many cases be far less efficient than shipping them to a store where the consumer can pick them up (if the consumer's trip to the store is ignored). In response to the threat of disintermediation, some retailers have attempted to integrate a virtual presence and a physical presence in a strategy known as bricks and clicks
Bricks and clicks is a business model by which a company integrates both offline and online presences, sometimes with the third extra flips...
Reintermediation can be defined as the reintroduction of an intermediary between end users (consumers) and a producer. This term applies especially to instances in which disintermediation has occurred first.
At the start of the Internet revolution, electronic commerce
Electronic commerce, commonly known as e-commerce, eCommerce or e-comm, refers to the buying and selling of products or services over electronic systems such as the Internet and other computer networks. However, the term may refer to more than just buying and selling products online...
was seen as a tool of disintermediation for cutting operating costs. The concept was that by allowing consumers to purchase products directly from producers via the Internet, the product delivery chain would be drastically shortened, thereby "disintermediating" the standard supply model middlemen. However, what largely happened was that new intermediaries appeared in the digital landscape (e.g. witness the success of Amazon and Ebay).;
Reintermediation occurred due to many new problems associated with the e-commerce disintermediation concept, largely centered on the issues associated with the direct-to-consumers model. The high cost of shipping many small orders, massive customer service issues, and confronting the wrath of disintermediated retailers and supply channel partners all presented real obstacles. Huge resources are required to accommodate presales and postsales issues of individual consumers. Before disintermediation, supply chain middlemen acted as salespeople for the producers. Without them, the producer itself would have to handle procuring those customers. Selling online has its own associated costs: developing quality websites, maintaining product information, and marketing expenses all add up. Finally, limiting a product's availability to Internet channels forces the producer to compete with the rest of the Internet for customers' attention, a space that is becoming increasingly crowded over time.
Examples of companies
The most notable example of disintermediation is Dell, which has succeeded in creating a brand, well recognized by customers, profitable and with continuous growth.
- Outlet store
An outlet store or factory outlet is a brick and mortar or online retail store in which manufacturers sell their stock directly to the public. Traditionally, a factory outlet was a store attached to a factory or warehouse, sometimes allowing customers to watch the production process like in the...
- Flat fee MLS
Flat Fee MLS generally refers to the practice in the real estate industry of a seller entering into an "à la carte service agreement" with a real estate broker who accepts a flat fee rather than a percentage of the sale price for the listing side of the transaction. The buyer's broker is still...
— An example of disintermediation in the Real Estate industry.
- Laiki agora
Laiki agora , also common in the plural Laikes agores , are street markets that operate all over Greece, selling foodstuffs and gardening or household equipment, as well as children toys and various "do it yourself" tools.It is considered an important social custom and tradition in...
- an example of disintermediation of agricultural foodstuffs in Greece