The market for residential real estate brokerage services: Costs of production and economies of scale

Although the market for real estate brokerage services has been the subject of intense scrutiny for many years, little empirical evidence has been forthcoming regarding the performance of this market. This paper employs a translog cost function to model the underlying production function for the residential real estate brokerage industry. The results indicate that, except for very large firms, modest economies of scale persist throughout almost the entire range of output. Our results also indicate that while average firm size is increasing, many real estate firms are too small to take full advantage of the cost reductions possible with a larger scale of operation. Equally important, large firms do not command a competitive advantage over smaller firms, as fer as unit costs are concerned.