In this article we provide an empirical framework to study entry and cost inefficiency in the real estate brokerage industry. Building upon recent empirical work on games of incomplete information, we develop an equilibrium model that incorporates uni...
In this article we provide an empirical framework to study entry and cost inefficiency in the real estate brokerage industry. Building upon recent empirical work on games of incomplete information, we develop an equilibrium model that incorporates unique features of this industry. Using individual-level data on entry and revenues, we estimate our entry model to recover the cost function. Based on estimated costs, we directly test for cost inefficiency due to free entry and find evidence for a loss of economies of scale and wasteful non-price competition. We further use the estimated model to evaluate welfare implications of prohibiting rebates on commissions. We find that rebate bans are welfare-reducing, not only because they discourage price competition, but also because they encourage excessive entry. In particular, removing these rebate bans would decrease the equilibrium number of realtors by 7.2% and reduce total variable costs by 4.1%.