Academic journal article Journal of Housing Research

Charm Pricing as a Signal of Listing Price Precision

Academic journal article Journal of Housing Research

Charm Pricing as a Signal of Listing Price Precision

Article excerpt

Abstract

Housing listing prices serve as sellers' initial offers in the negotiation process and both the magnitude and the design of listing prices may convey information about sellers' reservation prices. Sellers frequently offer their properties for sale at listing prices that are just below some round price (e.g., $199,900 instead of $200,000). Some researchers have dubbed this strategy "charm pricing." Previous studies of the impact of charm listing prices on transaction prices provide mixed results, suggesting that the ramifications of the charm pricing strategy are not yet fully understood. This paper presents an empirical investigation of the potential role of charm pricing as a signal of listing price precision or "firmness." The findings indicate that transactions with charm listing prices exhibit significantly smaller discounts than transactions that use non-charm listing prices.

This paper is the winner of the best paper on Housing award (sponsored by the Lucas Institute for Real Estate Development and Finance at Florida Gulf Coast University) presented at the 2006 American Real Estate Society Annual Meeting in Key West, Florida.

Real estate transactions involve negotiated prices rather than fixed or "take-it-or-leave-it" prices because the uniqueness and infrequent trading of individual properties make accurate value estimation more difficult for real estate assets than for more frequently traded, homogeneous assets. Sellers' initial offer prices, or listing prices, convey information to potential buyers about the transaction prices that sellers are willing to accept for their properties and are typically greater than or equal to sellers' reservation prices. Buyers use listing prices as a screening mechanism when searching for properties and when formulating their initial bid prices. Listing price magnitude is obviously important in the marketing and negotiation process for real estate, but real estate researchers are just recently beginning to consider how listing price design may also convey information from sellers to buyers.

As is the case with sellers of many other goods and services, real estate sellers often set "charm" listing prices-prices that are just below some round price (e.g., $199,900 instead of $200,000).' This topic has received considerable attention in the marketing research literature, but the emphasis there has been on consumer products (groceries, clothing, appliances, etc.) rather than on real estate assets. The marketing research literature suggests that charm pricing is an attempt by sellers to take advantage of buyers' cognitive processes in which the right-most digits of the price may lead a buyer to underestimate his/her perception of the price or to perceive something favorable about the item, the seller, or market conditions.

While the marketing literature generally supports the hypothesis that charm pricing has a positive impact on consumer product sales revenues, two recently published papers in the real estate literature provide conflicting evidence of the impact of charm pricing on transaction prices for real estate. Allen and Dare (2004) report that positive transaction price effects from charm pricing in house transactions in the Fort Lauderdale, Florida metropolitan area, while Palmon, Smith, and Sopranzetti (2004) report that charm pricing leads to negative transaction price effects in house transactions in Houston, Texas.

This paper uses data from the Allen and Dare (2004) study to gain additional insight into the role of charm pricing in real estate marketing and negotiations. Instead of directly examining transaction price effects, however, the focus in this study is on the use of charm prices to signal precision or "firmness" in the listing price. It is hypothesized that sellers use charm prices when they are more confident in their ability to establish a "firm" listing price for their properties. The null hypothesis is that the discount from listing price to transaction price is invariant to the use of charm listing prices. …

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