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DECEMBER 2019
Competition in the real estate brokerage industry: A critical review
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Panle Jia Barwick Department of Economics, Cornell University and NBER Maisy Wong University of Pennsylvania and NBER
This report is available online at: https://www.brookings.edu
The Brookings Economic Studies program analyzes current and emerging economic issues facing the United States and the world, focusing on ideas to achieve broad-based economic growth, a strong labor market, sound fiscal and monetary pol- icy, and economic opportunity and social mobility. The re- search aims to increase understanding of how the economy works and what can be done to make it work better.
ECONOMIC STUDIES AT BROOKINGS
Contents
About the Author ...... 3 Statement of Independence ...... 3 Abstract ...... 3 Acknowledgements ...... 3 Introduction ...... 5 Lack of competition and elevated commission fees ...... 5 Uniform commission fees ...... 7 Commission fees high relative to other countries and industries...... 8 Commissions do not reflect costs ...... 8 Industry concentration ...... 10 Contributing factors ...... 10 Welfare consequences of high commissions ...... 18 Policy discussion ...... 19 Digital platforms in the real estate industry ...... 23 Conclusions ...... 26 Tables ...... 27 References ...... 34
2 /// Competition in the real estate brokerage industry: A critical review
ECONOMIC STUDIES AT BROOKINGS
ABOUT THE AUTHOR
Panle Jia Barwick is an Associate Professor of Industrial Organization, Applied Econometrics, and Applied Mi- croeconomics in the Department of Economics at Cornell University. She serves as the co-director of Cornell Institute for china Economic Research (CICER). She is a faculty research associate at the National Bureau of Econmic Research (NBER), and editorial board member of VoxChina, and an associate editor of China Economic Review. Maisy Wong is the James T. Riady Associate Professor at the Wharton Department of Real Estate as well as the Assistant Director of the Grayken Program in International Real Estate. Her research interests include labor mobility, urbanization, housing, and real estate finance. Dr. Wong is a Research Associate at the NBER and is on the editorial board of the Journal of Urban Economics. Dr. Wong has a Bachelors from U.C. Berkeley (2003) and a Ph.D. in Economics from MIT (2008).
STATEMENT OF INDEPENDENCE
The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. They are not currently an officer, director, or board member of any organization with a financial or political interest in this article.
ABSTRACT
The past decade has witnessed remarkable technological innovations and a proliferation of new business models in the real estate sector. However, much of the potential of these innovations has yet to be realized, and most real estate brokerage firms command a persistently high price (commission fee) for services rendered that seems to vary little with the associated cost. This paper identifies structural hurdles that have limited competition, includ- ing the current commission payment arrangement whereby the seller pays commissions to both the listing agent and the buying agent, high concentration in local markets, the threat of retaliation, and consumer biases. We then describe the negative welfare consequences of high commissions, discuss policy recommendations that could enhance competition in commissions, and conclude with a brief discussion of the implications of recent innova- tions in this industry.
ACKNOWLEDGEMENTS
The authors would like to thank Judy Chevalier, Steve Coate, Gillies Duranton, Sonia Gilbukh, Paul Goldsmoth- Pinkham, Jerry Hausman, Benjamin Keys, and Mark Nadel for helpful comments. Adil Ahsan and Jiahua (Tiger) Wang provided exceptional research assistance. All errors are our own.
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