Comments on ?list price signaling and buyer behavior in the housing market?

Abstract

This paper addresses the role of the "list (asking) price" in signaling to buyers and the relationship of the list price to the buyer's bidding behavior and the resulting selling price. These are important issues in housing markets, as is recognized by most individuals who own or bid for residential property. There are interesting statistical implications concerning the selling and listing prices suggested by an analysis of the bargaining process. Reflecting upon the behavior of buyers and sellers in such markets (and personal experience) suggests a number of important issue~ that are closely related to the analysis in the paper. For example, what is the optimal listing price of the seller and what is the relationship between the original listing price and the dynamic reservation price of the seller? How should the bidding behavior of buyers be influenced by the list price? What does the listing price "signal" to potential buyers? What are the tradeoffs confronting the seller with respect to setting his listing price (advantages and disadvantages at the margin of slightly higher prices)? What are the dynamic properties of the asking price (including changes in the asking price), the selling price, and the time until sale? Specifically, how does the seller adjust his asking price through time as a function of the bids received (including their timing), and what implications does this suggest for the time series dynamics of the asking price and selling price? The paper makes an attempt to address some of these issues. My major concern about the theoretical model is that the analysis is not conducted in an equilibrium setting. For example, the analysis focuses upon buyer behavior (and the optimal bid of buyers in a special context) without explicitly examining the optimization problem of the seller. The authors are interested in modeling the signaling by sellers of their selection of list price and the information content of the listing price, but the decisions of sellers of different types are not modeled explicitly. Since the choice of listing price is exogenous, the structure of the model is not rich enough to examine central issues of interest with respect to the bargaining process for purchasing residences. For example, how does the seller select his list price and how does the choice of list price relate to the seller's actual reservation price (i.e., his equilibrium cutoff acceptance rule)? In turn, how does the list price influence the behavior of potential buyers? Because the list price is not determined as part of an optimization process, it is difficult to use the model to understand the role of the list price and how the list price serves as a credible signal. In contrast, in traditional models of signaling in economics (e.g., as illustrated by such classic papers as Spence, 1973; Rothschild and Stiglitz, 1976; and Riley, 1979) the type of an agent influences his decision so that the decision (such as a listing price) can convey information to the marketplace.