Bargaining power and segmented markets: Evidence from rental and owner-occupied housing

Abstract

In segmented markets for heterogeneous goods, prices reflect a mixture of demand for characteristics, bargaining power and market segmentation. This article integrates bargaining into the search model to investigate bargaining for housing across investors and owner-occupiers when the investment housing segment is also subject to a rental property discount. It provides a framework for empirically identifying separate price effects of property type and bargaining power. We exploit homestead exemption information to empirically identify sellers and buyers as investors or owner-occupiers. Data from Orange County, Florida, over 2000–2012 show a greater rental discount when controlling for investor bargaining power than when estimated in the conventional manner. In addition, investor relative bargaining power is not the same when selling to an owner-occupier as when buying from an owner-occupier. The results are robust across market phases and across neighborhoods.