Fee Setting Intermediaries: On Real Estate Agents, Stock Brokers, and Auction Houses

Joint with: Simon Loertscher

Mechanisms where intermediaries charge a commission fee and let the sellers set the price are widely used in practice e.g. by real estate brokers, art galleries or auction houses. We model competition between intermediaries in a dynamic random matching model, where in every period a buyer, seller and an intermediary are randomly matched. An intermediary has a temporary monopoly until traders are rematched and designs an exchange mechanism that maximizes his own profits. Traders' valuations for the indivisible good are altered by their continuation values. The following results obtain. First, the model has an analytical solution, where in equilibrium intermediaries use a fee setting mechanism and these are intermediary optimal mechanisms. Second, when the rematching probability increases, or equivalently the period length decreases, the equilibrium fees become smaller. Third, we derive the joint distribution of the offering price and time a good stays on the market — an often investigated issue in the empirical literature on real estate brokerage. Our framework can be extended to deal with several further questions: inefficient free entry in real estate brokerage, brokers selling their own houses, and mechanisms used by used car dealers.

For more information, contact Philipp Kircher.