A Pricing Model for Residential Homes with Poisson Arrivals and a Sales Deadline

Edward C. Rosenthal

Online First™, 4 June 2009

Abstract

We introduce a pricing model for single-family residences on the real estate market. The model considers purchase offers that arrive according to a Poisson process. The homeowner’s problem is to set a price that will maximize his net profit. The selling agent suggests a price to the homeowner that will maximize her net profit, which consists of her sales commission minus her costs. Our model accounts for a deadline to sell the home, a common feature of the housing market, beyond which fixed and variable penalty costs accrue to both the homeowner and selling agent. We demonstrate the behavior of the model and show under what conditions the owner’s and agent’s incentives are aligned. Our computational results suggest, in most circumstances, that agents should not pressure owners to substantially lower their asking prices in the presence of a deadline.Keywords  Pricing – Poisson arrival process – Time on the market – Selling deadline – Aligning incentives

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