Following the American Psychological Association’s Guidelines
Introduction
In this essay, how the real estate business is creating an oligopoly market in the city is to be discussed. As known, the new developing cities attract investors to the cities and the first investors in the city become the people related to the real estate business. The new developing cities are the places where changing economic conditions creates new job and business opportunities; therefore they attract more population including new investors, new workers, new service business etc. The more population in the new developing city means the higher demand for the accommodation facilities such as new buildings, condominiums, apartments, children parks, social facilities, and other residential related investments. All the new needs a developing city might have are related to the real estate business, and the demand for land increases. As a result of a higher demand for land, also it is known that the total amount of land is limited; the city faces higher prices for the land. The higher prices for the land cause a new result; an investor who is willing to invest in the real estate business becomes in need of higher amount of financial resources. This situation creates an oligopoly market in the real estate business. Mostly, financially strong companies can enter the market and the number of these companies becomes limited because of the limited amount of the land in the city. Another fact in the real estate business is the information. Only the big companies can make better studies to assess the values of the developing cities and this information gives them the power to be oligopolistic. Consequently, due to the higher demand and the higher prices for the land and the asymmetric information problems, we observe that an oligopolistic market comes into existence in the new developing cities.
Also it should be mentioned that even the old cities might face the same problem of oligopolistic real estate market, because the new developments in the settled and old cities might influence the value of the land. The change in the value of the land mostly causes an oligopolistic market in the real estate market. Thus, the oligopoly problem in this market might occur in the new developing cities and in the old cities as well.
Market Structures: Perfect Competition,
Monopolistic Competition, Oligopoly, and Monopoly
In this section, short information on the different market types is to be given. Perfect competition, monopolistic competition, monopoly, and oligopoly markets will be introduced at a basic level.
Perfect competition market is an idealistic market which is not possible to observe in the real life. The most important two features of the perfect competition are the following assumptions: 1) All the agents in the market has the full information of the market including the cost structures of the productions, quality of the products in the market, price determination processes, customer’s utilities, customers’ demand function, etc., and 2) Entrance to and exit from the market is free for sellers and buyers. Full information and free entry and exit assumptions create an environment where producers and buyers can do anything inside the market price mechanism; therefore, companies have the equal opportunity in the market.
Monopoly is a market structure where one company dominates the market and there exist insurmountable entry barriers. These barriers help the company hold the full market share. However, these barriers do not guarantee a full power to the only company in the market, because the company has to convince the customers in the market. We sometimes observe that monopoly companies are advertising to raise the company’s market power, even though it is a monopoly company.
Monopolistic competition market has a theoretical place between monopoly and perfect competitive market. In general there is perfect competition and there are no certain entry or exit barriers in the market. However, there is something different from perfect competitive market: Companies can differentiate their products. That makes a great difference between monopolistic competition and perfect competition markets. Companies aim at creating a temporarily monopoly power. Basically, companies try to create a product image telling customers that their product is better than other products, and when the customers believe in this claim, the company has a monopoly power. However, when the customers believe that there is no difference among the different companies’ products, the company loses the temporary monopoly power. Because of that, all the companies struggle to continue spending their efforts to have monopoly power and they spend a lot of resources for advertisement. Also, in the monopolistic competition market, the full information assumption does not hold, because the companies hide some information from the customers, while they are trying to differentiate their products from the other substitution products in the market.
Oligopoly market is a non-competitive market type, and there exist some barriers to enter the market. These barriers might be created due to some legal arrangements such as copyright laws, or economic barriers such as very high entrance investment costs, or an agreement on creating barriers among the strong incumbent companies. Because of these barriers, only a few companies might enter and operate in the market. For example, the train logistics market is an oligopoly market and cell phone markets are oligopoly markets, because, to enter these markets, a company needs to make a large amount of investment, and only a few companies can afford this spending. In the oligopoly market, companies would like to continue their power, and mostly they make an agreement implicitly or explicitly. These agreements are not required to be a written agreement, and even they are mostly verbal agreements.
The Structure of the Real Estate Market
The real estate market is an oligopoly market. In old times, the countries were trying to create a social equality, and people were getting equal amount of land per household. However, in the modern times, the human population has been increasing logarithmically and the demand for land is increasing accordingly. Consequently, as human race, we need to use more lands to create accommodations for people. The new dynamics for a world with larger population are creating new opportunities for cities. There are a few dominant industries and these industries are being relocated. For example, the more industrial production places are moving to the cities in the developing countries and the cities in the developed countries are becoming more service dominant places. This movement is causing a change in the value of the land in the different cities. Subsequently, the change in the value of the land is creating new opportunities in the cities.
The new opportunities appearing in the cities do not mean an equal opportunity for every citizen, because of the high costs of purchasing and developing real estates. Mostly, financially strong companies are being able to penetrate to the real estate market easily in the different part of the world. For example, we observe that some real estate companies in Florida is marketing shops, houses and other real estate products in Dubai, Istanbul or in other cities with an emerging economy, and they have the financial and organizational power to play an important role in the international real estate market while the local actors cannot enter this market. Thus, basically we observe that a certain number of players in the international real estate market has the capacity to catch any opportunity in any city all around the world, and the other local real estate agents cannot compete against them.
How can some real estate companies have that much power in the market? There are two main factors to answer this question: 1) They are financially strong, and 2) They have the capacity to gather the market information better than other people; therefore they are making better studies to guess the opportunities in the real estate market; in another word, there exists an inequality to reach the information – asymmetric information.
Analyzing the real estate at the city level, the local real estate agents and residents of the city has a big disadvantage against the large international real estate companies. As a result of this, the real estate market is an oligopoly market at the city level and at the international level.
Entry Barriers and Long Profitability for the Companies
The real estate market is very dynamic industry. The dynamic economies of the cities are immediately influencing the real estate market. Let us assume that a city with lower level of economic activity is being transformed into a developing city with new developing industries. As a result of the economic development in the city, the demand for the real estate increases, and subsequently, this increase causes an increase in the price of the real estate products. At the beginning, the local people and the local real estate agents have the property rights for the lands in the city, and they cannot collect the information efficiently compared to the large real estate companies to make better real estate investment decisions. Mostly, the owners of the real estates, after receiving a little better real estate prices for their properties, they will make a decision of selling their real estates, and they sell their real estate with a price lower than the future higher prices. The large real estate companies can easily develop a long term real estate development strategy for this city. In the short run, they purchase most of the lands in the city, and they develop their building and social facility projects. In the future, they can easily sell their developed real estate products for higher prices than the price they purchase from the local people and from the local real estate agents. In time, we can observe that most valuable lands belong to the large real estate companies. Because of the astronomic or higher prices for the real estate products, the ex-owners of these lands cannot enter the real estate market again. Consequently, the city has an oligopolistic real estate market.
In the short run, the local people and the local agents might make some profit by selling their real estate products; however, in the long run, the local agents may not have the opportunity to develop real estate and make higher profits. The large real estate companies have the capacity to develop real estate projects, and, considering that they have enough financial resources, the large companies will have better opportunity to make higher profits in the real estate market. Thus, we can claim that in the short run the local agents might make some profits, however, in the long run only the oligopolistic large companies can make profit.
Another important fact, the large companies can have hidden or explicit agreements among themselves, because they have better information and they have better human resources to use this information. Therefore, if they all see a common gain for all large companies, they can arrange agreements to create higher profits from the real estate business and share it. The number of the local agents is large, they cannot collect enough information, and they do not have high quality human resources. Subsequently, the large companies can create very high barriers for the local people and the local agents to enter the market and make profit in the long run.
The local people and the local agents mostly realize the situation later than the large companies. Even though they realize that the real estate business is gaining more value in the city, they might not afford to enter the market. Finally, the large companies sweep them out of the market.
Competitive Pressures in the Real Estate Market with High Barriers
In the real estate marker, there is no high competition. Mostly, we observe that a few large companies are leading the market, because the real estate business requires having a large amount of capital. Also developing real estate projects are also very costly. Beside the high costs, also the strong companies can make agreements to have the oligopolistic power in the market. Finally, we do not observe a competitive pressure in the real estate market.
However, as mentioned in the second section of this essay, having the monopoly or oligopoly power, the large companies might have some problems. The real estate market is important in the country economies. This sector provides accommodation and social facilities for the people. People might construct their own houses; but that might be costly; therefore, they prefer buying apartments inside condominiums with some social facilities. Consequently, we see that the large companies have an advantage of producing housing for people for lower costs. This lower cost advantage gives a power to the large companies to create a profit maximizing marketing strategy. Thus, we can observe the competition between the customers and the large real estate companies. The customers try to get more in quality and quantity, while the large companies try to maximize their profits.
Price Elasticity of Demand in the Real Estate Market
Because the amount of lands is limited and there is an oligopoly structure, the customers’ price elasticity of demand will be lower. As known, price elasticity of demand exhibits us how strong the customers are against the oligopolistic companies. In the real estate case, the customers have some advantages and some disadvantages. The customers can prefer other accommodation alternatives such as living in a close city, living in a village, staying in RV etc. However, on the other side, the city is attracting the people because of the more job opportunities. Thus, people are feeling that they need to live in this city. There might be many other factors influencing the strength of the customers and of course their price elasticity.
The real estate prices also might shape the demography of the population. For example, some people might create some social groups which help people to survive together. In this case, the people belonging to these social groups might catch better job opportunities, higher income and better living conditions. Therefore, they might be able to afford the higher prices for accommodation. Another case might like Detroit example. The automotive companies have hired many engineers and other blue collar workers in their factories. The blue collar people make higher income; therefore a group of people who can afford the higher prices for accommodation might be in the city. Thus, if there is a group of people who can afford the higher prices, than their price elasticity of demand might be lower. The customers become less sensitive to the prices. Otherwise, if the average income in the city is low, then the price elasticity of demand will be higher. In another word, the customers will be very sensitive to the prices.
The Role of Government’s Decisions on the Real Estate Market
Governments might intervene the real estate market, because the real estate market productions are also social products. Accommodation is important for people socially. In many culture, having a house, or having better accommodation conditions are also kind of prestige for people. Housing is also a part of socio-economic development, and governments are responsible for creating socio-economic development. With this background information, we can claim that a government with social objectives might intervene the real estate market.
In house renting business, we observe that some countries have developed some laws to protect the renters from the high prices. Also, some governments are trying to redistribute the lands in favor of poor people in the rural areas. Also some taxation application might be used to decrease the social loss due to the higher prices in the real estate market. Applying higher tax ratios for the secondary houses or for the income from developing real estate projects might decrease the profitability of the large real estate companies.
Another important factor that might be a reason for a government to intervene the market can be environment protection. As known, the real estate business is very closely related to the construction business. Construction business ingredients are gathered from the nature and it damages the environment. Thus, to protect the environment, a government might implement higher tax ratios for damaging the environment or might implement some other punishments. However, we observe that the large real estate companies can easily cope with these problems. They can create a pressure on the local governments and they can convince the governments to continue their activities. Also as known, some liberal political parties support the foreigner large companies and they might provide better opportunities for the large multinational companies.
International Trade’s Influence on the Real Estate Market
The real estate business is closely related with international trade. Some multinational companies are dominant in the real estate market. They find the best regions in the other countries to invest and they can carry large amount of capital to these countries. They also can create a political pressure on the local governments by using the power of capital. These companies also are able to create efficient organizations in the other countries with high skilled workers.
All the facts mentioned in the above paragraph, they can create a big influence on the developing countries and even on the developed countries. The last global financial crisis have proved us that the real estate market and other closed markets like mortgage and sub-mortgage markets might change the economic environment in the world. The crisis has spread to the other countries in a short time period.
Also these companies can organize their real estate production processes in different countries. Marketing departments locate in the developed countries while the cement and the other ingredients important for real estate business might locate in the developing countries with lower cost of production. By using all these advantages, they can easily penetrate into any economy.
These companies also show their power in the countries which experienced a large destruction due to the local wars such as Iraq, Lebanon, and other similar countries. They can make large profits and they carry their profits back to their home countries.
REFERENCES
Bardhan, A.D., R.H. Edelstein and C. Leung, 2004, “Globalization and Urban Residential Rents,” Journal of Urban Economics, 56, 3, 505-513.
Conover, C.M., H.S. Friday and G.S. Sirmans, 2002, “Diversification Benefits from Foreign Real Estate Investments,” Journal of Real Estate Portfolio Management, 8, 1, 17-25
Dokko, Y., R. Edelstein, A.J. Lacayo, and D.C. Lee, 1999, “Real Estate Value Cycles: A Theory of Market Dynamics,” Journal of Real Estate Research, 18, 1, 69-95.
Eichholtz, P.M.A., R. Huisman, K. Koedijk, and L. Schuin, 1998, “Continental Factors in
International Real Estate Returns,” Real Estate Economics, 26, 493-509
Newell, G. and J. Webb, 1996, “Assessing Risk for International Real Estate Investments,” The Journal of Real Estate Research, 11, 2, 103-115.
