Two-sided platforms and the 6 percent real estate broker commission

Borys Grochulski and Zhu Wang

No 25-05, Working Paper from Federal Reserve Bank of Richmond

Abstract: We build a model to explain the 6 percent real estate broker commission observed in the U.S. In our model, brokers operate a two-sided platform for trading homes. Using small-value handouts and exclusive buyer representation contracts, the platform captures the vast majority of buyers, thereby gaining a monopolist's position vis-á-vis the sellers. Home sellers' only outside option is to move while retaining ownership of their homes. Absentee homeownership, however, entails costs. As a monopolist, the platform sets its commission fee equal to the costs of absentee ownership. With these costs proportional to the home's value, the platform's optimal commission rate is the same for all homes, and remains insensitive to fluctuations in home valuations, while the platform's profit is pro-cyclical. The commission rate is also insensitive to reductions in underlying search costs because the seller's outside option does not involve selling the home. The model implies that commission rates should be higher where price rent ratios are higher—a prediction we verify in the data. We also consider optimal regulation: a ban on exclusive buyer representation contracts implements a second-best optimal allocation, in which the platform charges lower commissions that are sensitive to both home valuations and search costs.

Keywords: real estate brokers; broker commission; two-sided platforms; monopolist pricing (search for similar items in EconPapers)
JEL-codes: D42 L12 L85 (search for similar items in EconPapers)
Pages: 45
Date: 2025-06-25
New Economics Papers: this item is included in nep-com and nep-mic
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DOI: 10.21144/wp25-05

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