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Abstract
Housing listing prices serve as sellers' initial offers in the negotiation process and both the magnitude and the design of listing prices may convey information about sellers' reservation prices. Sellers frequently offer their properties for sale at listing prices that are just below some round price (e.g., $199,900 instead of $200,000). Some researchers have dubbed this strategy "charm pricing." Previous studies of the impact of charm listing prices on transaction prices provide mixed results, suggesting that the ramifications of the charm pricing strategy are not yet fully understood. This paper presents an empirical investigation of the potential role of charm pricing as a signal of listing price precision or "firmness." The findings indicate that transactions with charm listing prices exhibit significantly smaller discounts than transactions that use non-charm listing prices.
This paper is the winner of the best paper on Housing award (sponsored by the Lucas Institute for Real Estate Development and Finance at Florida Gulf Coast University) presented at the 2006 American Real Estate Society Annual Meeting in Key West, Florida.
Real estate transactions involve negotiated prices rather than fixed or "take-it-or-leave-it" prices because the uniqueness and infrequent trading of individual properties make accurate value estimation more difficult for real estate assets than for more frequently traded, homogeneous assets. Sellers' initial offer prices, or listing prices, convey information to potential buyers about the transaction prices that sellers are willing to accept for their properties and are typically greater than or equal to sellers' reservation prices. Buyers use listing prices as a screening mechanism when searching for properties and when formulating their initial bid prices. Listing price magnitude is obviously important in the marketing and negotiation process for real estate, but real estate researchers are just recently beginning to consider how listing price design may also convey information from sellers to buyers.
As is the case with sellers of many other goods and services, real estate sellers often set "charm" listing prices-prices that are just below some round price (e.g., $199,900 instead of $200,000).' This topic has received considerable attention in the marketing research literature, but the emphasis there has been on consumer products (groceries, clothing, appliances, etc.) rather than on real estate assets. The marketing research literature suggests that charm pricing is...