The merchant receives a finished thing and sells it for more than he paid. Nothing in its substance need change. The cloth is still cloth, the grain still grain; the difference appears in the account rather than in the object. This makes his income unusually easy to suspect. The maker can point to what was made. The merchant has to point to the distance crossed, the time waited, the quantity divided and the buyer found. His contribution is contained in the conditions under which the thing becomes available. Those conditions can be productive even when the thing remains exactly as it was.
Adam Smith gave this work a precise place among the employments of capital. Someone must carry goods from where they abound to where they are wanted; someone must divide a large purchase into portions suited to its users. The person who needs a little meat cannot conveniently keep the capital required to buy an entire animal. A retailer's stock can release the customer's resources for other uses. The distinction is between making an object and making it available on useful terms. Both can require labor and capital; the absence of a new physical object does not settle whether the second undertaking has produced a benefit.
The merchant also commits before the final customer has committed. A stocked shelf is a purchase made in anticipation of another purchase. Someone pays for the interval, selects the assortment and bears the possibility that the goods will spoil, become unfashionable or remain unsold. A shop offering credit adds a further undertaking: the buyer receives the use of the thing before completing payment for it. These services can be separated, contracted out or performed by the maker. Their combination in one business explains why a visible retail margin may contain several different prices without identifying how large any of them ought to be.
Consider an imagined good bought from its maker for sixty and offered in a shop for eighty. The visible difference is twenty. Suppose delivery, storage, selling labor and the opportunity cost of the capital committed come to fifteen per unit, with expected losses already included. The remaining five is the merchant's economic surplus under these assumptions. Calling the whole twenty profit would erase the work and resources used to earn the receipt. Calling the whole twenty the necessary cost of service would erase the five. The account has to make room for both.
Now suppose the customer can obtain the same good directly for sixty, but must spend thirty in time, travel and handling to receive it in the same condition. The direct purchase costs that customer ninety in all. Buying through the shop costs eighty and saves ten. The merchant's service uses fifteen in resources where the customer's alternative uses thirty, so the arrangement saves fifteen: ten goes to the buyer and five remains with the merchant. The maker's receipt and the finished good are unchanged. A higher selling price than buying price has accompanied a lower cost of getting the thing into the user's hands.
Change the shop price to eighty-five while leaving those costs and the purchase itself unchanged. The customer still gains five against the direct alternative; the merchant now keeps ten. The same fifteen in resources has been saved, but the division has moved. This is the point at which a defense of the merchant's existence ceases to answer a question about his charge. A useful service can be priced so that its provider takes more of the gain. If the higher price also drives away a customer whose value exceeds the resources needed to serve her, the change can destroy a gain as well as redistribute one. The size and consequence of the charge require their own examination.
Stockholding makes the visible comparison harder still. A merchant who buys one hundred units at six, sells ninety at eight and salvages ten at two receives seven hundred and forty against a purchase cost of six hundred. If the period's other economic costs are one hundred, the remainder is forty. The two-unit gap on each successful sale does not reveal that remainder by itself. Nor does a favorable remainder in one period establish the return expected when the stock was purchased. Some of what looks like a comfortable margin on the shelf is payment for goods that will never leave it at the displayed price.
The customer buys a bundle of conditions along with the object. Assortment saves a sequence of searches; a nearby location saves a journey; a reliable return procedure changes the risk of discovering a defect. Sarkar, Butler and Steinfield make this composite character of intermediation central to their account of electronic commerce. Moving information onto a network can unbundle the services and alter who performs them. It does not make every service disappear. Conversely, a service that once required an expensive shop can become cheaper when a new arrangement supplies it. The fact that the old merchant did useful work is compatible with his replacement.
Competition matters because another way of obtaining the same bundle can limit what the merchant keeps. Smith expected multiplying retailers to make their goods cheaper. The force of that expectation depends on the alternative being usable: another shop with stock, another route with acceptable delay, another supplier whose quality the buyer can judge. A second sign above a door is not enough if both sellers depend on an exclusive source or if changing shops imposes a cost greater than the saving. The relevant freedom is the customer's ability to move the transaction, and the maker's ability to reach the customer, on terms that can actually discipline the charge.
A merchant can strengthen those alternatives or obstruct them. Giving a small maker access to customers can enlarge the maker's market; insisting that the maker reach those customers only through this merchant can narrow the next bargain. Neither consequence follows simply from buying and reselling. To distinguish them, one has to follow the terms of access as closely as the flow of goods. The service may continue after the position has become powerful. A charge can then include both the cost of making the meeting possible and a return from making another meeting difficult.
The comparison also has to be fair to the proposed replacement. A customer's own unpaid effort has a cost. A cooperative warehouse needs management; a maker's direct sales need order handling; a public outlet needs stock and rules for allocating it. Coase's institutional question applies to all of them: which arrangement carries out the relevant transactions at what cost? Counting only the private merchant's invoice makes every alternative appear free until someone starts doing the work. Counting the alternative's costs does not protect the merchant from judgment. It supplies the terms on which the judgment can mean something.
The merchant's contribution lies in the terms of arrival; his power lies in what it costs to arrive another way.
The markup therefore asks two questions at once. What has been supplied between the maker's door and the user's hand, and how has the gain from supplying it been divided? The first can vindicate a trade that changes nothing visible in the object. The second can challenge a charge collected by someone whose work remains useful. The next plate follows an intermediary whose stock is made of promises, whose customers may all seek delivery at once, and whose margin is harder still to separate into service, danger and position. The argument remains open.