Spring 2012, VII, Issue I
- Optimal Economies of Scope in the Residential Real Estate Brokerage Industry
Recent studies of scale economies on residential real estate brokerages, using an efficient frontier, find increasing returns to scale for nearly the entire range of brokerage sizes, as measured by revenue units. However, the lower per unit cost of producing listing and sales may partially be explained by economies of scope. Economies of scope exist if producing sales and listings jointly in a single brokerage firm is more cost efficient than producing them in two separate brokerage firms that specialize. This study seeks to identify the inefficiencies in real estate brokerage. This is accomplished by first estimating economies of scope by specifying and estimating a composed-error translog cost function using Bayesian parameter estimates. Substantial economies of scope are found in the residential real estate brokerage industry. The results indicate that a firm that balances their output, rather than specializing in sales or listings, has an almost 53% cost saving advantage.