Profitability through product expansion: Does it work in the real estate brokerage industry?

Abstract

This paper examines the economics of product expansion in the real estate brokerage industry. A two-stage model is developed to examine the effects of product expansion on the profitability of these firms. In the first stage, a variable for additional complementary services is developed through a factor analysis for inclusion in a profitability regression model. In the second stage, the profitability regression equations are estimated with a sample selection correction. When compared with a pure residential brokerage strategy, product expansion offered by real estate brokerage firms has a statistically significant effect on revenues and net profit. The effect on the net margin, however, is statistically insignificant. The factor analysis indicates that inspection, financial, legal, and physical services appear to be important variables leading to higher revenues and net profits.