Perfect Competition Real Estates

To what extent do real estate agencies in Brisbane match the characteristics of a perfectly competitive industry?

For real estate agencies to meet the criteria for a perfectly competitive industry there are three criteria that they have to meet;

Many sellers with small firms

Homogenous product

Easy entry and exit into the particular industry

A basic chart showing the distinct qualities of a perfectly competitive industry, one in which any price above the current market price will not be filled, causing producers to become price takers, where they cannot determine the price, only the quantity supplied.

(A Layton, T Robertson, IB Tucker. 2005. Economics 2nd Edition Australia Nelson)

MANY SELLERS, SMALL FIRMS

There are many real estate firms that are currently in the market in Brisbane.

Large firms such as Raine & Horne, Ray Green, L J Hooker down to the small, privately owned outlets.

On the REIQ (Real estate institute of Queensland) website, (http://www.reiq.com.au) accessed April 6th 2007, a search for real estate agencies in Brisbane inner city alone returned 79 results.

These real estate agencies do not have enough power to influence price in the industry individually due to the large amount of competitors in the industry.

The vast amount of Real Estate firms around the Brisbane CBD, satisfy this theory for a perfectly competitive market in the real estate industry, by having many small firms with plentiful sellers, in which an individual firm cannot determine market price.

HOMOGENUS PRODUCT

To satisfy this second criteria, the product or services that are sold in an industry have to be identical.

The term �real estate’ means;

“Land, including all the natural resources and permanent buildings on it”.

(http://www.answers.com/topic/real-estate) Answers website Accessed April 6th 2007

Therefore, a real estate agency offers its service to sell or buy “land, including all the natural resources and permanent buildings on it” on behalf of the consumer.

So are the services that real estate agencies provide identical?

There are many differences in the type and degree of service a consumer is presented with by different real estate agencies.

Firms cannot charge more then the maximum legal rate of commission, which is 5% of the first $18,000 and 2.5% of the balance of the sale price.

Fair Trading website accessed April 08, 2007 (http://www.fairtrading.qld.gov.au/OFT/oftweb.nsf/0/7B752F3FBE4D72F94A256DDD001D25A0?OpenDocument)

While real estate agents have to follow these figures, in the Courier Mail (April 7-8 2007 p9) Leigh Lalonde stated not all agencies charge the maximum commission, some choosing to negotiate with consumers to suit individual needs while others offer flat rate fees.

Firms may also offer different forms of service, in an effort to differentiate themselves from other firms.

This does not suggest that real estate agencies all offer one, homogenus product, but in fact offer different products and levels of services that can vary greatly with different firms in the Brisbane CBD.

EASY ENTRY AND EXIT INTO INDUSTRY

Tom Burgess from Harcourt’s (interviewed April 8th 07) stated, to gain entry into the real estate industry, one has to enter a traineeship agreement with a registered agency.

To independently provide real estate services as a qualified agent, and to open an agency for ones self, a real estate agents license is required, with many companies providing training, such as REIQ. (http://www.reiq.com.au/CareerInfo/licence.asp) accessed April 6th 2007.

There are many courses in which have to be passed before various certificates of completion are awarded to the individual, which are needed to become an independent real estate agent and open up a private firm.

(http://www.macleay.edu.au/real.html) Macleay Education accessed April 2nd 2007

In conclusion it is found that there are minimal barriers in place for entry into the real estate industry.

What are the pros and cons (welfare implications) of the characteristics of a perfectly competitive industry?

Producer surplus is when goods or services are sold for more then it costs to produce, while consumer surplus is when consumers purchase a product or service for less then what it is worth to them.

(D McTaggart, C Findlay, M Parkin. 2006. Economics Australia Pearson)

In a perfectly competitive market, there is no consumer surplus at all, as the demand curve is perfectly elastic allowing no choice in price for the good or service for the consumer, only the quantity demanded. There can be producer surplus however if the producer sells it’s good or service for more then what it costs to produce.

In a perfectly competitive market the implications on society are;

Consumers