Two types of intermediaries play fundamentally different roles in economic activity. One type creates value. The other distributes value. The criterion for distinguishing between the two defines how we understand the true source of value in markets.
Value-creating intermediaries, with Apple as the classic case, are characterised by thenovel integration of elements that could not previously be combined, creating products that did not previously exist. In Apple case, scattered elements such as ARM CPUs, touch technology, the iOS ecosystem, and the App Store were integrated into the iPhone, a product category that did not exist before. The definingcharacteristic of this type of entity is: without it, the corresponding new product would not exist. It has irreplaceable integration value.
Markup intermediaries, with real estate agents and insurance agents as classic cases, are characterised by adding an intermediate layer to existing transactions without changing the product or service itself. Real estate agents match buyers and sellers. Insurance agentsmarket existing insurance products. Neither creates anything new. Their definingcharacteristic is raising the cost of acquiring the original product or service without creating substantive value.
The method for distinguishing between the two is simple: after removing the intermediary, does the original product or value still exist, and how does the cost change? For the value-creating intermediary, removal means the new category still exists (smartphones continue to exist), but one innovator is missing. For the markup intermediary, removal means the original product or service still exists, and the acquisition cost is lower.
This original observation has a precise correspondence in the academic economics literature. In a 1987 paper, Fred McChesney defined these two types of behaviour as Rent Creation and Rent Extraction. Rent creation corresponds to positive value creation. Rent extraction corresponds to the meaningless division of existing value, fully aligning with the observation above.
This framework has a direct practical implication for business model design: when choosing a business model, ask yourself one question. When I am removed from the transaction, does the cost go up or down? If it goes down, you are extracting rent. If it goes up, you are creating value.