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Wednesday, February 20, 2019 at 11:40am to 1:10pm
Sage Hall, 141
Johnson Graduate School-Management, 106 Sage Hall, Ithaca, NY 14853-6201, USA
Richard Lowery, Unversity of Texas, Austin
Collusion in Brokered Markets (joint w/John Hatfield & Scott Kominers)
Abstract: The residential real estate agency market presents a puzzle for economic theory: agent entry is common and agents’ costs to provide 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 facilitate transactions with. We show that monopoly 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 price. 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.