Competition and the signaling role of prices

In a market where sellers are heterogeneous with respect to the quality of their good and are more informed than buyers, high quality sellers' chances to trade might depend on their ability to inform buyers about the quality of the goods they offer. We study how the strength of competition among sellers affects the ability of sellers of high quality goods to achieve communication by means of appropriate pricing decisions in the context of a market populated by a large number of strategic price-setting sellers and a large number of buyers. When competition among sellers is weak high quality sellers are able to use prices as a signaling device and this enables them to trade. By contrast, strong competition among sellers inhibits the role of prices as signals of high quality, and high quality sellers are driven out of the market.     

Hot and Cold Markets

This article considers why housing market conditions, including the ratio of buyers to sellers, expected time-to-sale and transaction prices are sensitive to fundamentals. These high sensitivities result from feedback: market participants optimally respond to shocks in a manner that amplifies a shock's initial impact, which in turn elicits further reinforcing responses. For example, a positive demand shock brings more buyers into a market. This improves the bargaining position of sellers, who then sell more quickly, decreasing the stock of sellers in the market. This further increases the relative number of buyers to sellers, amplifying the initial shock.     

The Gender Gap in Real Estate Sales: Negotiation Skill or Agent Selection?

This study examines differences in net selling price for residential real estate across male and female agents. A sample of 2,020 home sales transactions from Fulton County, Georgia, are analyzed in a two‐stage least squares, geospatial autoregressive corrected, semi‐log hedonic model to test for gender and gender selection effects. Although agent gender seems to play a role in naïve models, its role becomes inconclusive as variables controlling for possible price and time on market expectations of the buyers and sellers are introduced to the models. Clear differences in real estate sales prices, time on market and agent incomes across genders are unlikely due to differences in negotiation performance between genders or the mix of genders in a two‐agent negotiation. The evidence suggests an interesting alternative to agent performance: that buyers and sellers with different reservation price and time on market expectations, such as those selling foreclosure homes, tend to select agents along gender lines.     

Real Estate Brokers and the Market for Residential Housing

This study explores the role of the real estate broker in the housing market. A model of the demand for broker services by both sellers and buyers is developed and conditional logit estimates are presented. Evidence relating to the effects of the brokerage industry on housing market transactions also is presented. Brokers do not seem to affect the prices of the houses they sell. But they do influence the level of housing consumption by buyers.     

The burgeoning role of iBuyers in the housing market

We examine the iBuyers’ business model and their impact on housing markets. We find that iBuyers tend to enter neighborhoods that have more easily priced and homogeneous homes, as price discovery is simpler and more consistent with their pricing algorithm in those areas. iBuyers purchase homes at lower prices than individual owner-occupiers, and this acquisition discount reflects the benefits iBuyers offer to motivated sellers rather than distressed home purchases or unobserved lower-quality housing characteristics. Last, a greater presence of iBuyers results in a higher volume of local housing transactions and encourages more home sellers to sell without listing.     

Buyer confusion and market prices

We employ a price setting duopoly experiment to examine whether buyer confusion increases market prices. Each seller offers a good to buyers who have homogeneous preferences. Sellers decide on the number of attributes of their good and set prices. The number of attributes bears no cost to the sellers and does not affect the value of the good to the buyers but adds complexity to buyers’ evaluation of the goods. The experimental results indicate that the buyers make more suboptimal choices and that prices are higher when the number of attributes of the goods is higher. Moreover, prices and profits are higher than those in a benchmark treatment with perfectly rational (robot) buyers.     

House Price Changes and Idiosyncratic Risk: The Impact of Property Characteristics

Although the average change in house prices is related to changes in fundamentals or perhaps market-wide bubbles, not all houses in a market appreciate at the same rate. The primary focus of our study is to investigate the reasons for these variations in price changes among houses within a market. We draw on three theories for guidance, one related to the optimal search strategy for sellers of atypical dwellings, another focusing on the bargaining process between a seller and potential buyers and the third relying on the concept of land leverage. We hypothesize that houses will appreciate at different rates depending on the characteristics of the property and the change in the strength of the housing market. These hypotheses are supported using data from three New Zealand housing markets.     

The Housing Market and Real Estate Brokers

The major development in this paper concerns the failure, in earlier studies, to consider interaction between alternative methods of arranging sales in the housing market. A seller may market a house by direct negotiations with buyers, without the intermediation of real estate brokers, or by listing the house with a broker. A rational seller would choose the option which offers the higher expected return on the house. In a sequence of models we argue that the seller's option of a method of sale induces competitive pressure in the choice of the commission rate by the broker. We also consider the split rate in a multiple listing system, ease of entry of brokers and the cartel hypothesis as applied to brokers. We conclude that the competitive pressure of direct negotiations between sellers and buyers, relative free entry of brokers and the inappropri-ateness of the cartel hypothesis cast serious doubt about a general consensus of opinion that the brokerage system is characterized by price fixing, excessive commissions and excessive marketing costs.     

Conflicts of interest and agent heterogeneity in buyer brokerage

This article investigates the incentives of agents working with buyers (buying agents) under the fixed percentage commission system and the implications on housing market outcomes. Our model shows that the absence of a binding contract creates a risk of losing clients for buying agents, which helps mitigate the conflict of interest between buying agents and their clients. Both the buying agent's prediction accuracy regarding their client's reservation prices and the level of tolerance given by the buyer to the buying agent affect the binding force. Results from simulations and empirical analyses using house transactions in Canada support our model predictions.     

Search algorithm,repetitive information,and sales on online platforms

A prominent feature of online sales is that buyers rely on the search tools offered by platforms to process information when searching for products. We develop a model that captures how the search algorithm affects buyers’ search processes, which further influences market equilibrium and welfare. If a platform adopts a highly unequal search algorithm, buyers are likely to obtain repetitive information about a small group of sellers, which causes buyers to consider fewer options and suppresses competition. By using data from food delivery platforms, we provide empirical evidence that markets with less equal distributions of store rankings in search results have higher average prices and more concentrated sales. We suggest that regulators should restrict search algorithms from showing repetitive information.     

Group identity in markets

We present a laboratory experiment that measures the effects of group identity—one's perceived membership in social groups—on market transactions in an oligopoly market with a few sellers and buyers. We artificially induce group identity using art preferences and college majors in different treatments, respectively. Subjects are randomly assigned into the roles of buyers and sellers and interact repeatedly. We find that the presence of groups influences both the selection of trading partners and the determination of prices. All else equal, sellers are more likely to make offers to ingroup buyers, and the buyers are more likely to accept offers from ingroup sellers. There are considerable intergroup price differentials with the outgroup sellers charging a lower price than the ingroup sellers.     

Collusion through Coordination of Announcements

A theory is developed to explain how sellers can effectively collude by coordinating on list prices (or surcharges), while leaving sellers to set their final prices. List prices are interpreted to be cheap talk announcements about cost information unknown to buyers. Buyers use those announcements to decide whom to invite to their procurement auction and the reserve price to set. By coordinating on a high list price to signal high cost, sellers produce supracompetitive prices by inducing buyers to be less aggressive, as reflected in a higher reserve price. We show that collusion can raise social welfare.     

The Effects of Charm Listing Prices on House Transaction Prices

As is the case for many different goods and services, it is common practice in many real estate markets for sellers to offer properties for sale at listing prices just below some round number price ( e.g. , $99,900 instead of $100,000). The academic marketing literature refers to this practice as "charm" pricing and suggests that this strategy is an attempt by sellers to take advantage of buyers' cognitive processes in which charm prices affect buyers' perceptions about the seller or the item being offered for sale. Although numerous papers in the housing economics literature have addressed the impact of the magnitude of listing price on observed house transaction prices, no prior published study has considered the impact of the design of listing prices in housing markets. This paper presents an empirical investigation of the effects of charm pricing on house transaction prices using sample data. The results provide some evidence that houses listed at certain charm prices sell for significantly greater transaction prices than those listed at round number prices.     

Restricted access: Real estate agent response to client race,ethnicity, gender,and side of market

We design and implement a correspondence experiment to test for differences in real estate agent response across client race, ethnicity, gender, and side of market. Real estate agents are more likely to respond to White clients than Black or Hispanic clients—Whites have a 32.18% higher response rate than Hispanics and an 8.48% higher response rate than Black clients. We also find that real estate agents are more responsive to sellers (23.81% premium over buyers) and female clients (13.57% premium over males).     

House Search Duration in Hot and Cold Residential Markets

This study analyzes the determinants of house search duration of consumption‐driven buyers and individual investors in different housing market environments. We use data from surveys of recent house‐buyers in “hot” and “cold” housing markets in the 2000s housing bubble in California characterized by rising and declining residential house prices, respectively. The average house price and the surveyed geographical area are the same for both periods. Expected house ownership horizon is shown to be an important determinant of the realized search duration in addition to commonly considered housing and buyer characteristics. We find a statistically significant positive effect of it on the time until purchase in both housing price environments for consumption‐driven buyers. We also find that consumption‐driven house purchases were highly pronounced in coastal areas in the hot market and inland areas in the cold market. In contrast, long‐horizon investment activity leads that of consumption activity in those areas. Short‐horizon investors, on the other hand, concentrated their house search activity in inland areas in both housing market environments.     

On the incidence of commissions in auction markets

We analyze the welfare consequences of an increase in the commissions charged by intermediaries in auction markets. Commissions are similar to taxes imposed on buyers and sellers, and standard economics suggests that both sellers and buyers are made worse off by the tax. However, we show that when the buyers' participation constraint binds and when sellers set optimal reservation prices, the level of commissions correlates to participation and reservation prices in such a way that participating buyers strictly gain from higher commissions.     

Mechanism choice and the buy-it-now auction: A structural model of competing buyers and sellers

A striking feature of many online sales platforms is the coexistence of multiple sales mechanisms. Items on eBay, for instance, are frequently offered through auctions, posted prices, and buy-it-now auctions. In this article, I study how this mechanism multiplicity influences the welfare of buyers and sellers. I specify and estimate a structural model of mechanism choice in online markets, in which I consider both sides of the market: On the demand side, buyers' choices among available listings are equilibrium outcomes of an entry game. On the supply side, sellers make equilibrium decisions when choosing sales mechanisms and prices. I estimate this model using data from sales of baseball tickets on eBay and calculate consumer and seller rents in three markets: the actual market with all three sales mechanisms and two counterfactual markets with auctions and fixed prices or only fixed-price listings, respectively. I find that the addition of auctions to fixed-price markets hurts sellers and risk-averse buyers but benefits risk-neutral buyers. Additionally, the consumer surplus increases when buy-it-now auctions are offered but the seller surplus is reduced further. I discuss the intuition for the cause of this result.     

Experimenting with purchase history based price discrimination

Many purchases of differentiated goods are repeated, giving sellers the opportunity to engage in price discrimination based upon the shopper's previous behavior by either offering loyalty discounts to repeat buyers or introductory rates to new customers. Recent theoretical work suggests that loyalty discounts can be profitable to sellers when customer preferences are not stationary and sellers can pre-commit to prices for repeat buyers, but otherwise returning customers can be expected to pay the same or more than new buyers. This paper reports behavior in controlled laboratory experiments designed to empirically test the impact of these factors on pricing strategies. The results generally support the comparative static predictions of the theoretical model. When customer preferences are fixed over time, sellers attempt to lure customers from their rival. Price pre-commitment for repeat shoppers when buyer preferences vary over time resulted in modest loyalty pricing, but the discounts are not as prevalent as predicted as sellers rarely price below cost. Behaviorally, price pre-commitment to loyal customers is found to reduce prices overall.     

Auction hosting site pricing and market equilibrium with endogenous bidder and seller participation

This paper characterizes the payoffs and pricing policies of auction hosting sites when both the bidders’ and the sellers’ participation is endogenous. Sellers have heterogeneous opportunity costs and make a listing decision depending on the listing fee and the expected revenue from the sale. On the other side of the market, factors such as facility in navigating an interface layout and prior bidding experience result in bidder heterogeneity with respect to participation costs. Bidders participate if their ex ante expected payoff from searching the site exceeds their participation costs. The auction site earns revenue by setting positive listing fees, trading off the increased revenue per seller resulting from a higher fee with the revenue reduction from the loss of sellers. Though this appears to be a classic monopoly problem, there are important differences. The reduction in the number of sellers participating in a site has feedback effects, as it affects the number of bidders who choose to visit that site, which in turn again affects the attractiveness of the site to sellers, and thus further reduces seller participation. In this environment the monopolist’s ability to extract rents is severely limited, even if one considers rent extraction from the seller side of the market only. It is demonstrated that the inverse demand curve is flatter than the demand curve obtained from the (inverse) distribution of seller costs. Moreover, the inverse demand curve has at least one and possibly multiple flat segments, leading to discontinuities in the profit function. Thus, small changes in the environment can lead to large changes in the optimal fee and market participation.     

Selling Time and Selling Price: The Influence of Seller Motivation

We consider the role that seller motivation plays in determining selling time, list price and sale price. A new survey of home sellers suggests that sellers are heterogeneous in their motivation to sell. Our findings are that a seller who, at the time of listing, has a planned date to move sells more quickly than one who does not. Also, the shorter the planned time until a move at the time of listing, the shorter the actual duration of marketing time. We find that seller motivation affects sale price, but not the list-price markup. Our results suggest that theoretical models of the housing search process should be recast to allow for heterogeneous sellers.