Tiers in Consumer Fractional Ownership Markets
Posted: 1 Aug 2011 Last revised: 15 Aug 2012
Date Written: August 10, 2011
In fractional ownership markets, consumers purchase a share in a property and can later exchange it with other owners through a secondary market. Forward-looking consumers may purchase low quality shares at a low price with the intention of trading up. This poses a serious problem. We show that firms can adopt a tiered approach for exchange so as to restore sales of high quality shares in the primary market, while at the same time facilitating exchanges in the secondary market. Data from laboratory markets strongly support this argument. Firm revenue and total social surplus are both higher in tiered than in tier-free markets. Furthermore, the impact of the tier structure depends on the exchange mechanism the firm uses. Over time, participants adapt to changes in tier structure in the direction predicted by theory. Risk aversion partly explains the deviation of data from theoretical predictions.
Keywords: fractional ownership, exchange mechanism, matching, economics experiments, risk aversion
JEL Classification: C78, C91, C92, D80
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