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

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  • Simon Loertscher
  • Andras Niedermayer

Abstract

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.

Suggested Citation

  • Simon Loertscher & Andras Niedermayer, 2007. "When is Seller Price Setting with Linear Fees Optimal for Intermediaries?," Department of Economics - Working Papers Series 1014, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:1014
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    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. John Rust & George Hall, 2003. "Middlemen versus Market Makers: A Theory of Competitive Exchange," Journal of Political Economy, University of Chicago Press, vol. 111(2), pages 353-403, April.
    4. Igal Hendel & Aviv Nevo & François Ortalo-Magné, 2009. "The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com," American Economic Review, American Economic Association, vol. 99(5), pages 1878-1898, December.
    5. Yavas, Abdullah, 1992. "Marketmakers versus matchmakers," Journal of Financial Intermediation, Elsevier, vol. 2(1), pages 33-58, March.
    6. Myerson, Roger B. & Satterthwaite, Mark A., 1983. "Efficient mechanisms for bilateral trading," Journal of Economic Theory, Elsevier, vol. 29(2), pages 265-281, April.
    7. 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.
    8. 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.
    9. repec:rus:hseeco:72158 is not listed on IDEAS
    10. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
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    More about this item

    Keywords

    Brokers; linear commission fees; optimal indirect mechanisms;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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