Premium
Price Strategies for Idiosyncratic Goods—The Case of Housing
Author(s) -
Read Colin
Publication year - 1988
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00462
Subject(s) - unobservable , price mechanism , microeconomics , reservation price , reservation , valuation (finance) , economics , real estate , rational expectations , unit price , renting , price on application , profit (economics) , price discrimination , unit (ring theory) , market price , econometrics , cost approach , finance , real estate investment trust , political science , law , mathematics education , mathematics
We determine the mechanism that a rational, profit‐maximizing seller would use to revise his reservation price for a heterogeneous or infrequently exchanged good. For instance, while one dimension of a home's quality may be easily determined in competitive markets (e.g., the valuation of floor size, location, etc.), other dimensions of quality may be idiosyncratic (unit specific) and unobservable by the seller (e.g., aesthetics of the home). Here, a seller of a new or infrequently exchanged housing unit may use sales success information to revise his expectation of the unit's market‐determined value and hence revise his reservation price. The rational seller will, upon arrival of the first buyer inspecting the unit, determine a sequence of reservation prices for this and expected subsequent buyers. This price sequence falls for subsequent buyers and starts from a lower initial price if the first buyer arrives later than expected. Through this mechanism, we offer an explanation for price dispersion and vacancy durations in housing markets. While we explicitly model the real estate market here, this price revision mechanism is also applicable to rental markets, labor markets, used car markets, and other markets characterized by heterogeneity and infrequent sales.