Why Do Buyers Pay Different Prices for Comparable Products? A Structural Approach on the Housing Market

Abstract

We focus on the housing market and examine why nonlocal home buyers pay 12% more for houses than local home buyers. We established a database on the residential housing market for Lafayette and West Lafayette, Indiana, that includes house transactions from 2000 to 2020. The dataset contains highly detailed information on individual buyers and house characteristics. We explain the price differential controlling for arguments such as imperfect information on prices, wealth effects, heterogeneous buyer preferences, and differential search and travel costs across buyers, among others. We estimate a housing demand model that returns heterogeneous marginal willingness to pay parameters for housing attributes. Our results show that nonlocal home buyers are willing to pay more for specific housing attributes, especially for house size, school quality, and house age. We also find that arguments such as gratification, reward, and imperfect price information explain the price differential to a large extent. Search and travel cost arguments have an adverse effect on nonlocal buyers’ house spending.