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Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses

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  • Simon Loertscher
  • Andras Niedermayer

Abstract

Mechanisms where intermediaries charge a commission fee and have the sellers set the price are widely used in practice e.g. by real estate agents, stock brokers, art galleries, or auction houses. We model competition between intermediaries in a dynamic random matching model, where in every period a buyer, a seller, and an intermediary are randomly matched. In any period, every intermediary has a temporary monopoly and designs an exchange mechanism that maximizes his own expected profits. Traders’ valuations for the indivisible good depend on their option value of future trade. The following results obtain. First, we show that the intermediary can achieve the highest possible profit with a fee setting mechanism. Second, we characterize when these fees are linear. Third, fee setting is an equilibrium outcome in a dynamic market. Fourth, when the rematching probability increases or, equivalently, the period length decreases, the equilibrium fees become smaller. Our model is applicable to stock brokers and auction houses as intermediaries. It can further explain several of the stylized facts observed in real estate brokerage, such as the 6 percent fee, the relation between listing price and time on market, inefficient free entry, higher prices for houses owned by brokers, and home owners who bought during a boom asking higher prices. We also provide various extensions.

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Bibliographic Info

Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1472.

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Date of creation: Nov 2008
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Handle: RePEc:nwu:cmsems:1472

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Keywords: brokers; applied mechanism design; linear commission fees; optimal indirect mechanisms; internet auctions; auction houses.;

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Citations

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Cited by:
  1. Simon Loertscher & Andras Niedermayer, 2012. "Assessing the Performance of Simple Contracts Empirically:The Case of Percentage Fees," Department of Economics - Working Papers Series 1163, The University of Melbourne.
  2. Artyom Shneyerov & Andras Niedermayer, 2011. "Search Brokers," 2011 Meeting Papers 89, Society for Economic Dynamics.
  3. Bar-Isaac, Heski & Gavazza, Alessandro, 2013. "Brokers' contractual arrangements in the Manhattan residential rental market," MPRA Paper 43967, University Library of Munich, Germany.
  4. Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
  5. Niedermayer, Andras & Shneyerov, Artyom, 2013. "For-Profit Search Platforms," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 436, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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