Optimal Pricing Strategy in the Case of Price Dispersion: New Evidence from the Tokyo Housing Market

44 Pages Posted: 12 Feb 2008 Last revised: 20 Feb 2012

See all articles by Yongheng Deng

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management

Kazuo G. Nishimura

Kyoto University - Institute of Economic Research

Diehang Zheng

University of Southern California - Sol Price School of Public Policy

Multiple version iconThere are 4 versions of this paper

Date Written: January 24, 2012

Abstract

In the wake of recent pronounced cycles in housing, substantial media and professional debate have focused on house price determination, and in particular, optimal seller pricing strategies. In this paper, we adopt a multistage search model, in which the home seller’s reservation price is determined by her opportunity cost, search cost, discount rate, and additional market parameters including the anticipated offer arrival rate and the offer price distribution. The optimal asking price is chosen so as to maximize the return from search. Theoretical results indicate that a greater dispersion in offer prices leads to higher reservation and optimal asking prices, which in turn result in a higher expected transaction price. Under the assumption that offer prices are normally distributed, a higher dispersion of offer prices also reduces time on the market for overpriced properties. A unique dataset from the Tokyo condominium re-sale market enables us to test those modeled hypotheses. Empirical results indicate that the standard deviation of transaction prices for each submarket, a proxy of offer price dispersion, is an important determinant of both pricing strategy and pricing outcomes. A one percentage point increase in the standard deviation of sub-market transaction prices results in a two-tenths of a percent increase in the initial asking price and in the final transaction price. Although overpriced properties stay on the market longer, increases in the dispersion of market prices enhance the probabilities of a successful transaction and/or an accelerated sale. Moreover, less well-informed sellers are more likely to list their properties at significantly higher prices and later reduce their list price. Those properties stay on the market longer and sell at about a three percent discount relative to the properties of better-informed sellers.

Keywords: price dispersion, search models, housing markets, time on the market

JEL Classification: D83, R00, R31

Suggested Citation

Deng, Yongheng and Gabriel, Stuart A. and Nishimura, Kazuo G. and Zheng, Diehang, Optimal Pricing Strategy in the Case of Price Dispersion: New Evidence from the Tokyo Housing Market (January 24, 2012). Available at SSRN: https://ssrn.com/abstract=1087115 or http://dx.doi.org/10.2139/ssrn.1087115

Yongheng Deng (Contact Author)

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Stuart A. Gabriel

University of California, Los Angeles - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-2922 (Phone)
310-206-5455 (Fax)

HOME PAGE: http://www.anderson.ucla.edu

Kazuo G. Nishimura

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan

Diehang Zheng

University of Southern California - Sol Price School of Public Policy ( email )

Los Angeles, CA 90089-0626
United States

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