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When is Seller Price Setting with Linear Fees Optimal for Intermediaries?

  • Simon Loertscher
  • Andras Niedermayer

Mechanisms where sellers set the price and are charged a linear commission fee are widely used by real world intermediaries, e.g. by real estate brokers. Empiri- cally these commission fees exhibit very little variance, both across heterogeneous regional markets and over time. So far, there is no theoretical explanation why such seller price setting mechanisms are used and why the linear fees vary so little. In this paper, we first show that in a Bayesian setup seller price setting with linear fees is revenue equivalent to the intermediary optimal direct mechanism derived by Myerson and Satterthwaite (1983) if and only if the seller’s cost is drawn from a generalized power distribution. Whenever such a mechanism is optimal, the fee structure is independent of the distribution from which the buyer’s valuation is drawn. Second, we derive the intermediary optimal direct mechanism when there are many buyers and possibly many sellers and we show that with one seller any standard auction with linear fees and reserve price setting by the seller (which are used e.g. by eBay) implements this mechanism if the seller’s cost is drawn from a power distribution and if buyers’ valuations are identically distributed. Third, we show that when the number of buyers approaches infinity while there is still one seller, seller price setting and price setting by the intermediary are equivalent, intermediary optimal mechanisms.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1014.

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Length: 18 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:mlb:wpaper:1014
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  1. John Rust & George Hall, 2002. "Middlemen versus Market Makers: A Theory of Competitive Exchange," NBER Working Papers 8883, National Bureau of Economic Research, Inc.
  2. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2007. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," NBER Working Papers 13360, National Bureau of Economic Research, Inc.
  3. Roger B. Myerson & Mark A. Satterthwaite, 1981. "Efficient Mechanisms for Bilateral Trading," Discussion Papers 469S, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Chang-Tai Hsieh & Enrico Moretti, 2003. "Can Free Entry Be Inefficient? Fixed Commissions and Social Waste in the Real Estate Industry," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1076-1122, October.
  5. 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.
  6. 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.
  7. Sandeep Baliga & Rakesh Vohra, 2010. "Market Research and Market Design," Levine's Working Paper Archive 506439000000000336, David K. Levine.
  8. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  9. Yavas, Abdullah, 1992. "Marketmakers versus matchmakers," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 33-58, March.
  10. repec:rus:hseeco:72158 is not listed on IDEAS
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