Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: The U.S. residential real estate agency market presents a puzzle for economic theory: agent entry is frequent and agents' costs of providing service are low, yet commissions on real estate transactions have remained constant and high for decades. We model the real estate agency market, and other brokered markets, as a repeated extensive form game; in our game, brokers first post prices for customers and then choose which agents on the other side of the market to work with. We show that prices appreciably higher than the competitive prices can be sustained (for a fixed discount factor) regardless of the number of brokers through strategies that condition willingness to transact with each broker on that broker's initial posted prices. Our results can thus rationalize why this market exhibits both fierce competition for customers and pricing high above marginal cost; moreover, our model can help explain why agents and platforms who have tried to reduce commissions have had trouble entering the market. Co-authored with Scott Duke Kominers and Richard Lowery.