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

Abstract

We adopt a multistage search model, in which the home seller's reservation price is determined by her or his opportunity cost, search cost, discount rate and additional market parameters. The model indicates that a greater dispersion in offer prices leads to higher reservation and optimal asking prices. A unique dataset from the Tokyo condominium resale market enables us to test those modeled hypotheses. Empirical results indicate that a one percentage point increase in the standard deviation of submarket transaction prices results in a two-tenths of a percent increase in the initial asking price and in the final transaction price. Increases in the dispersion of market prices enhance the probabilities of a successful transaction and/or an accelerated sale. © 2012 American Real Estate and Urban Economics Association.