Competition in the Real Estate Brokerage Industry - #15
Numerous times in the report, there have been statements of bankers and economists that there is little competition in the industry. In the same sections, real estate professionals and organizations state that there is fierce competition for business. This section tries to address these contradictory opinions.
One basic difference in the two viewpoints is what "competition" means to each. The real estate industry proponents state that we're all out there competing by interviewing for listings against multiple other companies, wooing buyers with our advertising and web site, etc. The fierce competition means that any one agent will only get a small percentage of these prospects to a commission. The economists believe competition should be much more on the "price" for our services.
Again, the massive influx of new agents into the business becomes a major talking point. With so many entering the business, the competition is stiffer. However, the belief of the economists is that this causes an inordinate expense of effort and resources in the "marketing" of agents and brokerages. Huge sums are spent in print, TV, radio and on the internet to woo consumers with claims of the best in services (what the economists call competition on the "service dimension." What they want to see is more competition on the "price dimension."
This quote says it all: "According to Hsieh, real estate agents may be competing intensely but do so primarily by expending resources to gain listings rather than competing by lowering their commission fees, a phenomenon Hsieh calls the “tragedy of the commission.” The “tragedy” of relatively inflexible commission rates, according to Hsieh, is not just that consumers receive more services and fewer commission fee reductions than many consumers might prefer, but that the agents themselves are no better off. Because the ratio of agents to buyers and sellers has increased, agents have to work harder to find clients and consequently spend less time actually closing transactions. In this manner, a larger number of agents dissipates the increased profit opportunities by incurring additional expenses to close transactions. Further, this theory suggests that because agents compete profits away by incurring additional expenses to provide these services, rather than lowering their commission rates, they operate at inefficiently high cost levels."
There is a theme here. How long can this industry continue to define the "bundle of services" the consumer should get and what it costs to provide them? At some point, there may be a need to actually respond to the services the consumer says they want and need. That will vary by consumer, but that's the case with most things. It's a diverse marketplace, and it's telling us that one homogeneous solution isn't meeting its needs.
Entire series: #1, #2, #3, #4, #5, #6, #7, #8, #9, #10, #11, #12, #13, #14, #15, #16, #17, #18, #19 & final
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