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Price Strategies for Idiosyncratic Goods—The Case of Housing

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  • Colin Read

Abstract

We determine the mechanism that a rational, profit‐maximizing seller would use to revise his reservation price for a heterogeneous or infrequently exchanged good. For instance, while one dimension of a home's quality may be easily determined in competitive markets (e.g., the valuation of floor size, location, etc.), other dimensions of quality may be idiosyncratic (unit specific) and unobservable by the seller (e.g., aesthetics of the home). Here, a seller of a new or infrequently exchanged housing unit may use sales success information to revise his expectation of the unit's market‐determined value and hence revise his reservation price. The rational seller will, upon arrival of the first buyer inspecting the unit, determine a sequence of reservation prices for this and expected subsequent buyers. This price sequence falls for subsequent buyers and starts from a lower initial price if the first buyer arrives later than expected. Through this mechanism, we offer an explanation for price dispersion and vacancy durations in housing markets. While we explicitly model the real estate market here, this price revision mechanism is also applicable to rental markets, labor markets, used car markets, and other markets characterized by heterogeneity and infrequent sales.

Suggested Citation

  • Colin Read, 1988. "Price Strategies for Idiosyncratic Goods—The Case of Housing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 16(4), pages 379-395, December.
    • Handle: RePEc:bla:reesec:v:16:y:1988:i:4:p:379-395
    DOI: 10.1111/1540-6229.00462
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    Cited by:

    1. Ping Cheng & Zhenguo Lin & Yingchun Liu, 2008. "A Model of Time‐on‐Market and Real Estate Price Under Sequential Search with Recall," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 36(4), pages 813-843, December.
    2. Peyman Khezr & Flavio M. Menezes, 2016. "Dynamic and Static Asking Prices in the Sydney Housing Market," The Economic Record, The Economic Society of Australia, vol. 92(297), pages 209-221, June.
    3. Thomas J. Miceli, 1989. "The Optimal Duration of Real Estate Listing Contracts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(3), pages 267-277, September.
    4. Jianping GU & Yasushi ASAMI, 2016. "Optimal List Price And Duration Of Vacancy In The Housing Market In Tokyo," Review of Urban & Regional Development Studies, Wiley Blackwell, vol. 28(3), pages 182-201, November.
    5. John D. Benjamin & G. Donald Jud & G. Stacy Sirmans, 2000. "What Do We Know About Real Estate Brokerage?," Journal of Real Estate Research, American Real Estate Society, vol. 20(1), pages 5-30.
    6. Edward P. Lazear, 2010. "Why Do Inventories Rise When Demand Falls in Housing and Other Markets?," NBER Working Papers 15878, National Bureau of Economic Research, Inc.
    7. Ping Cheng & Zhenguo Lin & Yingchun Liu, 2021. "Competing Selling Strategies in the Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 63(3), pages 394-413, October.
    8. Rena Sivitanidou, 1999. "Office Rent Processes: The Case of U.S. Metropolitan Markets," Working Paper 8664, USC Lusk Center for Real Estate.
    9. John L. Goodman, Jr., 1993. "A Housing Market Matching Model of the Seasonality in Geographic Mobility," Journal of Real Estate Research, American Real Estate Society, vol. 8(1), pages 117-138.
    10. Nasser Daneshvary & Terrence Clauretie, 2013. "Agent Change and Seller Bargaining Power: A Case of Principal Agent Problem in the Housing Market," The Journal of Real Estate Finance and Economics, Springer, vol. 47(3), pages 416-433, October.

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