Methods for estimating interregional trade flows do not deal explicitly with middlemen. As a result, in many cases, the estimated flows are biased. In this paper a model which allows an explicit treatment of the middlemen problem is offered. It is suggested that under some simple assumptions regarding the behaviour of middlemen, a Markov chain approach is appropriate. The model is applied to the Israeli dairy industry in 1973. The results obtained show that the mean deviation between gross interregional flows, which do not take into account flows from middlemen, and net interregional flows, which take into account and correct for flows among middlemen, is approximately 14%.
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