Price Strategies for Idiosyncratic Goods—The Case of Housing

Abstract

We determine the mechanism that a rational, profit-maximizing seller would use to revise his reservation price for a heterogeneous or infrequently exchanged good. For instance, while one dimension of a home's quality may be easily determined in competitive markets (e.g., the valuation of floor size, location, etc.), other dimensions of quality may be idiosyncratic (unit specific) and unobservable by the seller (e.g., aesthetics of the home). Here, a seller of a new or infrequently exchanged housing unit may use sales success information to revise his expectation of the unit's market-determined value and hence revise his reservation price. The rational seller will, upon arrival of the first buyer inspecting the unit, determine a sequence of reservation prices for this and expected subsequent buyers. This price sequence falls for subsequent buyers and starts from a lower initial price if the first buyer arrives later than expected. Through this mechanism, we offer an explanation for price dispersion and vacancy durations in housing markets. While we explicitly model the real estate market here, this price revision mechanism is also applicable to rental markets, labor markets, used car markets, and other markets characterized by heterogeneity and infrequent sales. Copyright American Real Estate and Urban Economics Association.

Home Price, Time-on-Market, and Seller Heterogeneity Under Changing Market Conditions

“…The assumption of bidding prices being uniformly distributed is another widely adopted assumption in early studies including Read (1988), Yavas (1992), Sirmans et al (1995), and Arnold (1999), as well as a more recent study by Cheng et al (2008). For technical simplicity, we adopt the same assumption.…”

“…andBarron (1975)), and it has been extensively applied to the real estate market since the 1980s (e.g Yinger (1981),Read (1988),Quan and Quigley (1991),Yavas (1992),Arnold (1999),Lin and Vandell (2007)…”

An Optimal Strategy for Maximizing the Expected Real-Estate Selling Price: Accept or Reject an Offer?

“…A number of buyers, some serious and others just curious, view the house, and perhaps even make exploratory offers, which the seller can use to revise his reservation price as explained by, e.g., Read (1988). After some time, the sales agent tells the seller that the matter has reached the stage when there are left only two serious buyers.…”

Property delisting, housing cycle and pricing bias

“…The assumption of bidding prices being uniformly distributed is another widely adopted assumption in early studies including Read (1988), Yavas (1992), Sirmans et al (1995), Arnold (1999), and Cheng et al (2008). For technical simplicity, we adopt the same assumption.…”