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Competition and Value-Of-Service Pricing in the Residential Real Estate Brokerage Market

Authors
Disciplines
  • Logic

Abstract

The services of residential real estate brokers are normally priced at a fixed percentage of the selling price of the house. Since the direct cost of selling a house is virtually unrelated to house value, this custom is an example of value-of-service pricing-a practice often regarded as prima facie evidence of collusive price discrimination. This article presents a simple model of the market for real estate brokerage services in which value-of-service pricing emerges as a property of competitive equilibrium. Thus, inferences of noncompetitive broker conduct, based on the prevalence of percentage-of-house-value pricing, may be incorrect.

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