Academic journal article Real Estate Economics

Real Estate Brokers, Nonprice Competition and the Housing Market

Academic journal article Real Estate Economics

Real Estate Brokers, Nonprice Competition and the Housing Market

Article excerpt

One topic of continuing interest in the real estate literature concerns the relationship between the real estate brokerage industry and the economic efficiency of the housing market (Crockett 1982; Miceli 1992; Wu and Colwell 1986; Yinger 1981; Yavas 1995; and Zumpano and Hooks 1988). Still, there are unanswered questions concerning how real estate brokers affect the overall efficiency of the housing exchange process and, specifically to the point of this paper, how the institutional arrangement in the broker services market affects the housing market.

The market for real estate broker services has an interesting blend of observable characteristics when compared to other private markets for other services. In particular, the commission rate, the price paid for broker services, is typically invariant across agents and over time, which is often taken as evidence of some form of market-wide "price fixing."(1) At the same time, though, entry into the real estate broker services markets is easy, a characteristic of competitive markets which is not easy to reconcile with the price fixing hypothesis. If commission rates are set high enough to generate economic profits for real estate brokers, more brokers will enter the market to gamer the super-normal return; the process of entry continues until the economic profits are dissipated somehow. The question addressed by Crockett (1982), Miceli (1992) and this paper, concerns the mechanism by which economic profits are dissipated in the broker services market and the implications for economic efficiency in both the broker services and housing markets.(2)

Clearly, if price competition is precluded then profits must be dissipated by entry along some nonprice margin. Crockett (1982), for example, envisions profit dissipation from firms hiring more and more agents as they attempt to gamer larger shares of listings from house sellers available; in the zero profit equilibrium, there is an over supply of agents relative to the efficient outcome. Similarly, Miceli (1992) assumes that profits are dissipated by brokers' advertising expenditures, undertaken to win a larger share of listings of house sellers available;(3) in zero profit equilibrium resources are expended on nonproductive advertising. Both models are similar in that they view the nonprice competitive margin facing brokers as comprising inherently non-productive actions, services not valued by the individuals using their expertise - house buyers and sellers.

This paper reexamines the connection between broker nonprice competition and housing market inefficiency. The contribution here lies in our treatment of the avenue for "nonprice" competition available to real estate brokers under the fixed commission rate hypothesis. Instead of assuming that the margin for nonprice competition lies along a dimension not valued by customers, this paper begins with the recognition that nonprice competition can occur along a "quality" or product characteristics dimension. In general, firms can compete by offering to work harder for potential customers, provide higher quality services or other desired characteristics. This paper argues that broker services provide a good example of a product for which such a nonprice competitive dimension is available. Although it is popular to view the real estate broker product as that of simply matching buyers and sellers, usually depicted as the outcome of pure search effort (Crockett 1982; Wu and Colwell 1986; Yinger 1981; and Yavas 1990, 1995), the firm provides more than simple search activity to the customer.

Brokers can help sellers (and buyers) to varying degrees throughout the entire transaction process: helping the seller set the asking price (Arnold 1992), guiding buyers when they formulate their offers, providing some guidance through the maze of paperwork faced by buyers and sellers and recommending reliable inspectors, lawyers, mortgage brokers, etc. Thus, the broker's output is best viewed not as a completed transaction, but rather as a completed transaction at some level of service provided to the parties involved. …

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