Optimal Pricing Strategy in the Case of Price Dispersion: New Evidence from the Tokyo Housing Market

Abstract

In the wake of recent pronounced cycles in housing, substantial media and professional debate have focused on house price determination, and in particular, optimal seller pricing strategies. In this paper, we adopt a multistage search model, in which the home seller’s reservation price is determined by her opportunity cost, search cost, discount rate, and additional market parameters including the anticipated offer arrival rate and the offer price distribution. The optimal asking price is chosen so as to maximize the return from search. Theoretical results indicate that a greater dispersion in offer prices leads to higher reservation and optimal asking prices, which in turn result in a higher expected transaction price. Under the assumption that offer prices are normally distributed, a higher dispersion of offer prices also reduces time on the market for overpriced properties. A unique dataset from the Tokyo condominium re-sale market enables us to test those modeled hypotheses. Empirical results indicate that the standard deviation of transaction prices for each submarket, a proxy of offer price dispersion, is an important determinant of both pricing strategy and pricing outcomes. A one percentage point increase in the standard deviation of sub-market transaction prices results in a two-tenths of a percent increase in the initial asking price and in the final transaction price. Although overpriced properties stay on the market longer, increases in the dispersion of market prices enhance the probabilities of a successful transaction and/or an accelerated sale. Moreover, less well-informed sellers are more likely to list their properties at significantly higher prices and later reduce their list price. Those properties stay on the market longer and sell at about a three percent discount relative to the properties of better-informed sellers.