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Article Excerpt
As is the case for many different goods and services, it is common practice in many real estate markets for sellers to offer properties for sale at listing prices just below some round number price (e.g., $99,900 instead of $100,000). The academic marketing literature refers to this practice as "charm" pricing and suggests that this strategy is an attempt by sellers to take advantage of buyers' cognitive processes in which charm prices affect buyers' perceptions about the seller or the item being offered for sale. Although numerous papers in the housing economics literature have addressed the impact of the magnitude of listing price on observed house transaction prices, no prior published study has considered the impact of the design of listing prices in housing markets. This paper presents an empirical investigation of the effects of charm pricing on house transaction prices using sample data. The results provide some evidence that houses listed at certain charm prices sell for significantly greater transaction prices than those listed at round number prices.
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The purpose of listing prices in housing markets is to convey information to potential buyers about the transaction prices that sellers are willing to accept for their properties. Sellers set listing prices that are equal to or above their reservation prices to serve as their initial offer prices in the negotiation process, and buyers use listing prices as a screening mechanism when searching for properties and formulating their bid prices. Previous housing market researchers have shown that sellers' choices of listing price may significantly impact housing transactions relating to transaction prices and marketing duration (time on market). These studies focus on the magnitude of sellers' listing prices and largely ignore any other dimension of the listing price that could impact transactions. This study attempts to fill this gap and addresses the issue of whether the design of listing prices may also impact observed transaction prices. Specifically, this study empirically investigates the relationship between "charm" listing prices and transaction prices in housing markets.
Charm prices refer to listing prices that are set just below some round price (e.g., $99,900 instead of $100,000). (1) The marketing research literature suggests that in addition to price magnitudes, sellers may consider the design dimension of prices in an effort to take advantage of buyers' cognitive processes. That is, the rightmost digits of the listing price may cause a buyer to underestimate his/her perception of the price (referred to as "level" effects) or to perceive something favorable about the item, the seller, or market conditions (referred to as "image" effects). This paper tests the hypothesis that charm listing prices result in statistically significant transaction price effects using a large sample of single-family house transactions from the Fort Lauderdale, Florida, metropolitan area. The results of our analysis provide some evidence that transaction prices may indeed be significantly related to the use of charm listing prices.
The paper is organized as follows. The first section provides reviews of the housing economics literature on the role of listing prices in housing transactions and of the marketing discipline literature on charm pricing strategies. The next section describes the data and the empirical model used to test for potential relationships between charm listing prices and transaction prices. The third section discusses the results of our tests. The final section summarizes the study.
Literature Review
Housing Economics Literature
Numerous published articles by housing economics researchers address the role of listing price in house transactions, each with an emphasis on the magnitude of the listing price rather than its design. Among the most relevant articles to the present study are works by Miller and Sklarz (1987), Northcraft and Neale (1987), Haurin (1988), Horowitz (1992), Knight, Sirmans and Turnbull (1994), Yavas and Yang (1995), Arnold (1999) and Anglin, Rutherford and Springer (2003). (2)
Miller and Sklarz (1987) consider the possibility that setting higher listing prices (relative to equilibrium property value) for real estate assets leads to higher transaction prices, as is sometimes the case with low-ticket goods and services. Using data from residential condominium transactions in Hawaii, they find that greater listing prices (relative to equilibrium property value) do not necessarily result in greater transaction prices, and they conclude that the "price reliance" phenomenon is not likely to be a prominent feature in a high-ticket market such as real estate.
Northcraft and Neale (1987) also consider the price reliance phenomenon in real estate markets, but they use experimental techniques rather than observed transactions. In their study, amateurs (college students) and experts (real estate brokers) are given listing price (and other) information about houses and are asked to estimate the values of the properties. Their results contradict those of Miller and Sklarz (1987) and suggest that the magnitude of listing price information significantly impacts the valuations of both amateurs and experts.
Haurin (1988) also considers how the seller's choice of listing price magnitude conveys information about the property to potential buyers. He provides empirical evidence that sellers of atypical houses recognize that the distributions of expected offers for such houses have greater variances than typical houses and thus set higher listing prices relative to market prices as a way of extending the marketing time so more offers can be considered.
Horowitz (1992) considers the relationship between listing price magnitudes and marketing duration in housing markets by proposing a search-theoretic model in which sellers set listing prices that balance two competing effects on expected sales price: a lower listing price increases the probability of bids from interested buyers over time, but it also sets a maximum for any individual bid because buyers know that any offer at or above the listing price will be accepted. His model provides rigorous explanations of why utility-maximizing house sellers set listing prices (as opposed to no or "infinite" listing prices) and why the optimal listing price is not equal to the seller's reservation price.
Knight, Sirmans and Turnbull (1994) also develop a search-theoretic model of housing markets in which buyers use the information in listing prices as signals of sellers' likely responses to various offers. Their model suggests that "lower listing prices increase the proportion of buyers who will make an offer, but, at the same time reduce the offer forthcoming from any single buyer" (Knight, Sirmans and Turnbull 1994, p. 182) such that the true information content of listing prices for selling prices remains an empirical issue. The ultimate impact of listing price on transaction price in their model depends on buyer search costs and the types of buyers (defined by their tastes for housing) in the market.
Yavas and Yang (1995) extend Horowitz' (1992) work by adding real estate brokers to their search model. As in the Horowitz model, the magnitude of the listing price signals the seller's lowest acceptable price, but in their model the buyers and brokers (agents of the seller) adjust their search intensities based on the seller's listing price. From...
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