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

2025-02-28

AI Summary

This paper investigates how digital technologies—particularly generative AI—reduce content production costs, thereby triggering disintermediation, and analyzes its implications for social welfare and content quality. We develop a three-party game-theoretic model involving intermediaries, technology suppliers, and consumers, integrating equilibrium analysis with welfare-economic evaluation. We find that disintermediation exhibits a U-shaped threshold: it occurs when production costs are either very high or very low. While intermediaries increase total welfare, they fully capture the marginal gains and may suppress content quality. Supplier competition intensity and intermediary fee design serve as critical moderating factors. This study is the first to systematically characterize the non-monotonic conditions under which disintermediation arises and to quantify the intermediary’s dual distortion effects—on welfare distribution and quality incentives—providing theoretical foundations for platform governance and AI-driven content ecosystem policy. (149 words)

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Humans and AI: Game Design — Procedural Content Generation & Storytelling
• Multiagent Systems: Mechanism Design

Application Category

• Economics, Online Markets and Human Computation: Economic ramifications for generative AI infrastructure and applications
• Web Mining and Content Analysis: Web data quality in the era of algorithmically-generated content
• Social Networks and Social Media: Generative AI / large language models and their impact on social systems

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.

Problem

• Investigates when technology improvements cause disintermediation in supply chains.
• Analyzes impact of disintermediation on welfare and content quality.
• Explores how competition and fee structures influence disintermediation effects.

Innovation

• Generative AI reduces content production costs.
• Game theory models disintermediation in supply chains.
• Analyzes competition impact on disintermediation dynamics.