Advanced Search
MyIDEAS: Login

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

Contents:

Author Info

  • 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://andras.niedermayer.ch/uploads/File/fee_setting_intermediaries.pdf
File Function: main text
Download Restriction: no

Bibliographic Info

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

as in new window
Length:
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:nwu:cmsems:1472

Contact details of provider:
Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Phone: 847/491-3527
Fax: 847/491-2530
Email:
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC

Order Information:
Email:

Related research

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

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Anderson, Simon P. & de Palma, Andre & Kreider, Brent, 2001. "Tax incidence in differentiated product oligopoly," Journal of Public Economics, Elsevier, vol. 81(2), pages 173-192, August.
  2. Wolinsky, Asher, 1988. "Dynamic Markets with Competitive Bidding," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 71-84, January.
  3. Serrano, Roberto, 2002. "Decentralized information and the Walrasian outcome: a pairwise meetings market with private values," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 65-89, September.
  4. Michael Peters & Sergei Severinov, 1995. "Competition Among Sellers who offer Auctions Instead of Prices," Working Papers peters-95-02, University of Toronto, Department of Economics.
  5. Sullivan, Mary W, 1997. "Slotting Allowances and the Market for New Products," Journal of Law and Economics, University of Chicago Press, vol. 40(2), pages 461-93, October.
  6. Diamond, Peter A., 1971. "A model of price adjustment," Journal of Economic Theory, Elsevier, vol. 3(2), pages 156-168, June.
  7. Hackett, Steven C., 1992. "A comparative analysis of merchant and broker intermediation," Journal of Economic Behavior & Organization, Elsevier, vol. 18(3), pages 299-315, August.
  8. Dale T. Mortensen & Randall Wright, 2002. "Competitive Pricing and Efficiency in Search Equilibrium," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(1), pages 1-20, February.
  9. Anderson, Simon & de Palma, Andre & Kreider, Brent, 2001. "The Efficiency of Indirect Taxes Under Imperfect Competition," Staff General Research Papers 5203, Iowa State University, Department of Economics.
  10. Alp Atakan, 2007. "Competitive Equilibria in Decentralized Matching with Incomplete Information," 2007 Meeting Papers 213, Society for Economic Dynamics.
  11. Genesove, D. & Mayer, C.J., 1994. "Equity and Time to Sale in the Real Estate Market," Working papers 94-02, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Steven D. Levitt & Chad Syverson, 2008. "Market Distortions When Agents Are Better Informed: The Value of Information in Real Estate Transactions," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 599-611, November.
  13. Han Bin Kang & Mona J. Gardner, 1989. "Selling Price and Marketing Time in the Residential Real Estate Market," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 21-35.
  14. Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
  15. 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.
  16. Francois Ortalo-Magne & Aviv Nevo & Igal Hendel, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," 2007 Meeting Papers 89, Society for Economic Dynamics.
  17. Alp E. Atakan, 2006. "Assortative Matching with Explicit Search Costs," Econometrica, Econometric Society, vol. 74(3), pages 667-680, 05.
  18. Baliga Sandeep & Vohra Rakesh, 2003. "Market Research and Market Design," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 3(1), pages 1-27, August.
  19. Genesove, David & Mayer, Christopher, 2001. "Loss Aversion and Seller Behaviour: Evidence from the Housing Market," CEPR Discussion Papers 2813, C.E.P.R. Discussion Papers.
  20. Abdullah Yavas & Shiawee Yang, 1995. "The Strategic Role of Listing Price in Marketing Real Estate: Theory and Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(3), pages 347-368.
  21. Bulow, Jeremy & Roberts, John, 1989. "The Simple Economics of Optimal Auctions," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1060-90, October.
  22. Gianni De Fraja & Jozsef Sakovics, 2004. "Walras Retrouve: Decentralized Trading Mechanisms and the Competitive Price," ESE Discussion Papers 36, Edinburgh School of Economics, University of Edinburgh.
  23. Michael Keen, 1998. "The balance between specific and ad valorem taxation," Fiscal Studies, Institute for Fiscal Studies, vol. 19(1), pages 1-37, February.
  24. Asher Wolinsky & Stephan Lauermann, 2009. "Search with Adverse Selection," 2009 Meeting Papers 827, Society for Economic Dynamics.
  25. McAfee, R Preston, 1993. "Mechanism Design by Competing Sellers," Econometrica, Econometric Society, vol. 61(6), pages 1281-1312, November.
  26. James Peck, 1995. "Competition in Transactions Mechanisms: The Emergence of Price Competition," Working Papers 022, Ohio State University, Department of Economics.
  27. Nadia Burani, 2008. "Matching, search and intermediation with two-sided heterogeneity," Review of Economic Design, Springer, vol. 12(2), pages 75-117, June.
  28. Alexander Matros & Andriy Zapechelnyuk, 2006. "Optimal Mechanisms for an Auction Mediator," Discussion Paper Series dp424, The Center for the Study of Rationality, Hebrew University, Jerusalem.
  29. Simon P. Anderson & Regis Renault, 1999. "Pricing, Product Diversity, and Search Costs: A Bertrand-Chamberlin-Diamond Model," RAND Journal of Economics, The RAND Corporation, vol. 30(4), pages 719-735, Winter.
  30. John Rust & George Hall, 2002. "Middlemen versus Market Makers: A Theory of Competitive Exchange," NBER Working Papers 8883, National Bureau of Economic Research, Inc.
  31. Lawrence R. Glosten & Paul R. Milgrom, 1983. "Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders," Discussion Papers 570, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  32. Michael A. Arnold, 1992. "The Principal-Agent Relationship in Real Estate Brokerage Services," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 89-106.
  33. Darrell Duffie & Nicolae Garleanu & Lasse Heje Pedersen, 2005. "Over-the-Counter Markets," Econometrica, Econometric Society, vol. 73(6), pages 1815-1847, November.
  34. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
  35. Yavas, Abdullah, 1992. "Marketmakers versus matchmakers," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 33-58, March.
  36. Thomas Gehrig, 1993. "Intermediation in Search Markets," Discussion Papers 1058, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  37. John Wooders, 1997. "Equilibrium in a market with intermediation is Walrasian," Review of Economic Design, Springer, vol. 3(1), pages 75-89.
  38. Darrell Duffie & Bruno Strulovici, 2012. "Capital Mobility and Asset Pricing," Econometrica, Econometric Society, vol. 80(6), pages 2469-2509, November.
  39. James E. Larsen & Won J. Park, 1989. "Non-Uniform Percentage Brokerage Commissions and Real Estate Market Performance," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 422-438.
  40. Spulber, Daniel F., 1988. "Bargaining and regulation with asymmetric information about demand and supply," Journal of Economic Theory, Elsevier, vol. 44(2), pages 251-268, April.
  41. Hsuan-Chi Chen & Jay R. Ritter, 2000. "The Seven Percent Solution," Journal of Finance, American Finance Association, vol. 55(3), pages 1105-1131, 06.
  42. Riley, John & Zeckhauser, Richard, 1983. "Optimal Selling Strategies: When to Haggle, When to Hold Firm," The Quarterly Journal of Economics, MIT Press, vol. 98(2), pages 267-89, May.
  43. Rutherford, R.C. & Springer, T.M. & Yavas, A., 2005. "Conflicts between principals and agents: evidence from residential brokerage," Journal of Financial Economics, Elsevier, vol. 76(3), pages 627-665, June.
  44. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, vol. 38(114), pages 175-208, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Artyom Shneyerov & Andras Niedermayer, 2011. "Search Brokers," 2011 Meeting Papers 89, Society for Economic Dynamics.
  2. Loertscher, Simon & Niedermayer, Andras, 2012. "Assessing the Performance of Simple Contracts Empirically: The Case of Percentage Fees," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 435, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  3. 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.
  4. Zhu Wang & Julian Wright, 2012. "Ad-valorem platform fees and efficient price discrimination," Working Paper 12-08, Federal Reserve Bank of Richmond.
  5. Bar-Isaac, Heski & Gavazza, Alessandro, 2013. "Brokers' contractual arrangements in the Manhattan residential rental market," MPRA Paper 43967, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nwu:cmsems:1472. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.