Collusion in Brokered Markets

John William Hatfield; Scott Duke Kominers; Richard  Lowery

Working Paper | HBS Working Paper Series | 2020

Collusion in Brokered Markets

by John William Hatfield, Scott Duke Kominers and Richard Lowery

Abstract

The U.S. residential real estate agency market presents a puzzle for economic theory: commissions on real estate transactions have remained high for decades even though entry is frequent and costs are low. We model the real estate agency market, and other brokered markets, as a game in which brokers first post prices for customers and then choose which other agents to work with. We show that prices appreciably higher than the competitive level can be sustained (for a fixed discount factor) regardless of the number of brokers by using strategies that condition working with a broker on that broker’s posted prices.

Keywords: real estate; ＂Repeated games＂; collusion; antitrust; brokered markets; Game Theory; Real Estate Industry;

Language: English

Format: Print

67 pages

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Citation:

Hatfield, John William, Scott Duke Kominers, and Richard Lowery. "Collusion in Brokered Markets." Harvard Business School Working Paper, No. 20-023, September 2019. (Revised July 2020.)

This paper develops a class of equilibrium-independent predictions of competitive equilibrium with indivisibilities. Specifically, we prove an analogue of the “Lone Wolf Theorem” of classical matching theory, showing that when utility is perfectly transferable, any agent who does not participate in trade in one competitive equilibrium must receive her autarky payoff in every competitive equilibrium. Our results extend to approximate equilibria and to settings in which utility is only approximately transferable.

Hatfield and Kominers (2012) introduced a model of matching in networks with bilateral contracts and showed that stable outcomes exist in supply chains when firms' preferences over contracts are fully substitutable. Hatfield and Kominers (2012) also asserted that in their setting, full substitutability is equivalent to the assumption that all indirect utility representations of each firm's preferences are quasisubmodular; we show here that this claimed equivalence result does not hold in general. We show instead that full substitutability is equivalent to weak quasisubmodularity of all indirect utility representations.

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Collusion in Brokered Markets

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