Intermediation in Markets with Buyer and Seller Selection: Theory and an Application to Real Estate Brokerage
52 Pages Posted: 5 Jan 2016
Date Written: December 16, 2015
Many markets are one-to-one matching markets in which match-making intermediaries enable pairs of buyers and sellers to negotiate a transaction price for a good or service. Examples are real estate markets in which realtors search for matches between potential home buyers and sellers, or labor markets in which employment services help the unemployed find work by filling firms’ vacancies. This paper investigates the socially optimal size and market structure of such markets. Firstly, it shows that it is socially optimal for intermediaries to have some market power. That is, it is socially optimal that intermediaries charge a service fee that is above the per-match cost as this excludes some low valuation buyers, which are disliked by sellers, as well as some high reservation price sellers, which are disliked by buyers. Secondly, it shows that matching markets are generally characterized by an excessive number of intermediaries that operate in the market compared to what is socially optimal. When calibrating the model using data from the Belgian real estate brokerage industry, the welfare counterfactuals suggest that the observed average commission rate of 4.3% is below the socially optimal commission rate, which is estimated to be in the range between 5.1% and 24%. A welfare gain of 1% to 11% could be established when regulating broker service fees, given the number of brokers that currently operate in the market. When also regulating broker entry, a further welfare gain of 7% to 69% could be realized. Various other policy relevant welfare counterfactuals are constructed and discussed.
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