Perfect Competition - Real Estates

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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.

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