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Impossibility of a Competitive Equilibrium in the Real Estate Brokerage Industry

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  • Abdullah Yavas

    ()
    (Pennsylvania State University, University Park)

Abstract

This note shows that the presence of fixed costs (e.g., licence fees, fees for local, state and national realtor associations, continuing education expenses, some of the office expenses, etc.) in the real estate brokerage industry makes it impossible to have competitive commission rates as the equilibrium outcome. In fact, the only pure strategy Nash equilibrium involves monopoly commission rates. This outcome compels alternative equilibrium explanations for the industry and for the future research on brokerage.

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File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol21n03/compequil.pdf
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Bibliographic Info

Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

Volume (Year): 21 (2001)
Issue (Month): 3 ()
Pages: 187-200

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Handle: RePEc:jre:issued:v:21:n:3:2001:p:187-200

Contact details of provider:
Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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Web page: http://www.aresnet.org/

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Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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References

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  1. Sirmans, C. F. & Turnbull, Geoffrey K., 1997. "Brokerage Pricing under Competition," Journal of Urban Economics, Elsevier, vol. 41(1), pages 102-117, January.
  2. Arnott, R. & Anglin, P., 1995. "Are Brokers' Commission Rates on Home Sales Too High? A Conceptual Analysis," G.R.E.Q.A.M. 95a21, Universite Aix-Marseille III.
  3. William C. Goolsby & Barbara J. Childs, 1988. "Brokerage Firm Competition in Real Estate Commission Rates," Journal of Real Estate Research, American Real Estate Society, vol. 3(2), pages 79-85.
  4. Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-72, March.
  5. Schroeter, John R., 1987. "Competition and Value-Of-Service Pricing in the Residential Real Estate Brokerage Market," Staff General Research Papers 11116, Iowa State University, Department of Economics.
  6. Carroll, Wayne, 1989. "Fixed-Percentage Commissions and Moral Hazard in Residential Real Estate Brokerage," The Journal of Real Estate Finance and Economics, Springer, vol. 2(4), pages 349-65, December.
  7. John H. Crockett, 1982. "Competition and Efficiency in Transacting: The Case of Residential Real Estate Brokerage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 10(2), pages 209-227.
  8. Bartlett, Randall, 1981. "Property Rights and the Pricing of Real Estate Brokerage," Journal of Industrial Economics, Wiley Blackwell, vol. 30(1), pages 79-94, September.
  9. Alger, Dan, 1987. "Laboratory Tests of Equilibrium Predictions with Disequilibrium Data," Review of Economic Studies, Wiley Blackwell, vol. 54(1), pages 105-45, January.
  10. James R. Follain & Terry Lutes & David A. Meier, 1987. "Why Do Some Real Estate Salespeople Earn More Than Others?," Journal of Real Estate Research, American Real Estate Society, vol. 2(1), pages 73-81.
  11. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  12. Yinger, John, 1981. "A Search Model of Real Estate Broker Behavior," American Economic Review, American Economic Association, vol. 71(4), pages 591-605, September.
  13. Williams, Joseph T, 1998. "Agency and Brokerage of Real Assets in Competitive Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 239-80.
  14. Martin Sefton & Abdullah Yavas & Eric Abrams, 2000. "An experimental comparison of two search models," Economic Theory, Springer, vol. 16(3), pages 735-749.
  15. Bart Wilson, 1998. "What Collusion? Unilateral Market Power as a Catalyst for Countercyclical Markups," Experimental Economics, Springer, vol. 1(2), pages 133-145, September.
  16. Davis, Douglas D. & Williams, Arlington W., 1986. "The effects of rent asymmetries in posted offer markets," Journal of Economic Behavior & Organization, Elsevier, vol. 7(3), pages 303-316, September.
  17. Shaked, Avner & Sutton, John, 1982. "Relaxing Price Competition through Product Differentiation," Review of Economic Studies, Wiley Blackwell, vol. 49(1), pages 3-13, January.
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Cited by:
  1. Bruce, Donald & Santore, Rudy, 2006. "On optimal real estate commissions," Journal of Housing Economics, Elsevier, vol. 15(2), pages 156-166, June.
  2. Thomas J. Miceli & Katherine A. Pancak & C. F. Sirmans, 2006. "Is the Compensation Model for Real Estate Brokers Obsolete?," Working papers 2006-23, University of Connecticut, Department of Economics.

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