Distribution of Goods and Services

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DISTRIBUTION OF GOODS AND SERVICES. It is not unreasonable to wonder why all products are not sold directly from producer to final consumer. The simple answer is that distributors lower the costs of market transactions in a specialized economy. First, distributors lower the costs of market transactions by taking advantage of economies of scale and scope. For example, retail stores typically offer many varieties of goods. It would be very costly for consumers to purchase every item directly from producers. Second, distributors reduce the information costs of market transactions. Wholesale merchants traditionally, and retail merchants more recently, lower the costs of trade by lowering the costs of discovering supply and demand conditions. Third, distributors also lower the cost of trade by solving the asymmetric information problem. This problem typically arises when consumers cannot easily discern the quality of a product sold in the market place. Historically, the wholesale merchants solved this problem by organizing exchanges that inspected quality and standardized grades. The traditional local retail merchants often solved this problem by developing a reputation for honesty. Over time, as market transactions became increasingly anonymous, multiunit chain retail stores and multiunit manufacturing firms used advertising and branding as a solution to the asymmetric information problem.

Changing Patterns of Distribution

The nature of production and of the distribution of goods and services has changed greatly over the course of American history. As the basis of the U.S. economy shifted from agriculture to manufacturing, and then, more recently, to service industries, distribution's role in the economy changed along with the nature of the goods produced and sold in the market.

The market economy of colonial America in the seventeenth and eighteenth centuries was dominated by agriculture, fisheries, and the other extractive industries. For those goods produced for the market, the general merchant was the key distributor. The merchant bought goods of all types and was the ship owner, exporter, importer, banker, insurer, wholesaler, and retailer. The merchant's role, however, was often limited to the distribution of goods and services intended for the very wealthy. Most households manufactured their own clothing, farm implements, candles, and so on, and performed many household services themselves.

In the early nineteenth century, revolutions in transportation and communications increased the size of domestic markets, which led in turn to significant organizational changes in the production and distribution of goods and services. Although households continued to produce many of their own services such as cooking, laundering, and cleaning, the production and distribution of goods that were part of the market economy became more extensive and specialized. As the United States became an industrial nation, manufacturing firms that specialized in a single product line began to proliferate. In response, the general merchant gave way to distributors who specialized in one or two product lines, such as cotton, provisions, wheat, dry goods, hardware, or drugs. As new products were introduced, wholesale merchants specializing in these products also emerged.

The first census of distribution, taken in 1929, provides a picture of the flow of goods (especially manufactured goods) from producer to consumer. Manufacturers ultimately sell their goods to two distinct markets: industry and the home consumer. The census data shows that manufacturers sold 31 percent of their goods directly to final industrial consumers and 2.5 percent to final home consumers. The rest was sold to distributors such as wholesalers, manufacturers' own sales branches, and retailers. These distributors then resold their products to final industrial consumers or to retailers. The retailers in turn resold their products to final home consumers. In total, 169,702 wholesale establishments distributed $69 billion worth of goods. Manufacturing goods constituted 81 percent, farm products 13 percent, and the remainder, from other extractive industries, 6 percent. These goods were distributed by different types of wholesalers. Merchant wholesalers, agents, and brokers distributed 79 percent of the goods, whereas manufacturer's sales branches accounted for 21 percent. Some 1,476,365 retail establishments distributed $48.3 million worth of goods to final consumers.

The emergence of a national domestic market in the twentieth century transformed the organization of production and distribution once again. In the early twentieth century, mass retail distributors and chains replaced many local store merchants. These multiunit retail firms often purchased their products directly from manufacturers. Moreover, as the twentieth century progressed, wholesale merchants were squeezed from the other direction. Many large multiunit manufacturing firms began to market their products directly to consumers and retailers. Yet, despite these trends, the traditional wholesale merchants continued to play a significant role in the American economy.


Chandler, Alfred, Jr. The Visible Hand: The Managerial Revolution in American Business. Cambridge, Mass.: Harvard University Press, 1977.

Kim, Sukkoo. "Markets and Multiunit Firms from an American Historical Perspective." In Multiunit Organization and Multimarket Strategy. Edited by Joel A. C. Baum and Heinrich R. Greve. Advances in Strategic Management 18 (June 2001), 305–326.


See alsoRetailing Industry .

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