Price competition in the spatial real estate market: allies or rivals?

Abstract

This paper examines real estate pricing featuring the price response curve, both theoretically and empirically. The Bertrand model with di¤erentiated products suggests that the price response of real estate may di¤er when properties in the vicinity are priced by an a¢liated …rm or one's own …rm. This is because the …rm can maintain the collusive state if real estate prices in the neighborhood are priced by allies, whereas it loses it if prices are priced by rivals. To examine this prediction, a spatial autoregressive model with autoregressive and heteroskedastic disturbances, including a share of allies in the vicinity, is estimated using data on the residential condominium market in central Tokyo. Empirical results provide support for the model prediction.

Raising the bar (11)

“…This model reads as Y = ρWY + Xβ + ε, where Y is an N × 1 vector of the dependent variable; W is an N × N spatial weight matrix; ρ is the SAR coefficient; X is an N × K matrix of explanatory variables; β is a K × 1 vector of corresponding parameters to be estimated; and ε is an N × 1 vector of error terms with mean 0 and variance σ 2 . The next four papers in this issue by Iwata, Sumita, and Fujisawa (2018, in Using transaction price data of residential condos in central Tokyo, Iwata et al (2018, in this issue) investigate whether or not a real estate firm can avoid price competition when its market power is high or when it cooperates with other firms (allies) in the vicinity. To do this, they estimate an SAR model extended to contain an exogenous variable θ with parameter γ measuring the share of an ally's properties.…”

“…In addition, they assume that ρ > 0, which does not seem to be in line with the idea of price competition, as has recently been pointed out by Wang (2018) and discussed in the Editorial to issue 13(4) of this journal (Elhorst et al 2018a). However, Iwata et al (2018, in this issue) offer a counterargument: when rivals decrease the price of units, a real estate firm will lose customers if it does not do the same; consequently, it will also have the tendency to decrease prices.…”