Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, October 15, 2019

Collusion in Brokered Markets

John William Hatfield, University of Texas at Austin, Scott Duke Kominers, Harvard University, and Richard Lowery, University of Texas-Austin have a paper on Collusion in Brokered Markets.

ABSTRACT: The U.S. residential real estate agency market presents a puzzle for economic theory: commissions on real estate transactions have remained constant and high for decades even though agent entry is frequent and agents’ costs of providing service are low. We model the real estate agency market, and other brokered markets, via repeated extensive form games; 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; this is done through strategies that condition willingness to transact with each broker on that broker’s initial posted prices. Our results can thus rationalize why brokered markets exhibit pricing high above marginal cost despite fierce competition for customers; moreover, our model can help explain why agents and platforms who have tried to reduce commissions have had trouble entering the market.

| Permalink


Post a comment