Academic journal article Real Estate Economics

An Experimental Analysis of the Impact of Intermediaries on the Outcome of Bargaining Games

Academic journal article Real Estate Economics

An Experimental Analysis of the Impact of Intermediaries on the Outcome of Bargaining Games

Article excerpt

Abdullah Yavas [*]

Thomas J. Miceli [**]

C.F. Sirmans [***]

We conduct an experimental analysis of the bargaining between a buyer and a seller of the exchange of a single good by means of an intermediary or broker. We examine how an intermediary affects the price, the likelihood of a successful negotiation, and the time it takes to complete a negotiation. We first examine the impact of the intermediary as a pure middleman, and then as an information source about the distribution of seller and buyer reservation prices. The results show that an intermediary, whether or not informed, increases the sale price, reduces the likelihood of an agreement, and increases the time to reach an agreement (though the number of bargaining rounds declines). The results suggest that the benefits of brokerage may be predominantly in the matching of buyers and sellers rather than in facilitating bargaining.

Intermediaries, or brokers, [1] play an important role in facilitating the exchange of goods and services in many markets. Examples include the housing market, the labor market, and the securities market. In this paper, we report the results of an experimental analysis of the role of brokers in bargaining over the sale of a single good. We focus on how the presence of a broker affects the likelihood of a successful negotiation, the time it takes until a negotiation is completed, and the determination of the sale price. We examine these factors both when the broker is uniformed and when she is informed about the distribution of buyer valuation and seller costs. This allows us to ask whether brokers who have superior market information compared to traders can use this information to improve the efficiency of bargaining, for example, by economizing on transaction costs.

Our results suggest that, on the whole, brokers reduce the likelihood of reaching an agreement, and increase the time it takes for a successful negotiation to be completed (though they reduce the number of rounds of bargaining).

Interestingly, the presence of an informational advantage by brokers does not alter this conclusion. Brokers also cause the sale price to be higher, though this result is likely sensitive to the compensation scheme. Overall, the results do not provide the evidence that brokers increase efficiency in bargaining games. This suggests that the benefits of brokers may arise primarily in the matching stage of transactions between buyers and sellers. The experimental methodology enables us to isolate these two stages from each other and focus on the role of brokers in the bargaining game between buyers and sellers. It also enables us to identify the impact of such factors as the buyer's and seller's reservation prices, initial bid and ask prices, and the gender of players on the outcome of the bargaining game. Some of these factors, such as the buyer's and seller's reservation prices, are not available in field data because of their unobservable nature.

To our knowledge, this is the first attempt to provide an experimental analysis of the role of brokers in bargaining games. It is thus an important extension of the existing literature on bargaining and brokerage. In addition, the results have implications for the impact of brokers on the operation of markets in which intermediaries play a prominent role in arranging transactions.

The paper is organized as follows. The next section reviews the theoretical and experimental literature on bargaining with intermediaries and relates our analyses to the existing work. The third section provides the theoretical foundations for our analysis and formulates the main hypotheses to be examined. The fourth section describes the experimental setting, and the fifth section presents the results. The sixth section then comments on the applicability of the results to real estate brokerage. The final section discusses the implications of the results.

Related Literature

There is a considerable amount of theoretical and experimental literature on bargaining. …

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