Property price gravitated by Prisoner’s Dilemma

Prisoner’s Dilemma

In Game Theory, Prisoner’s Dilemma is a typical example shows that two rational parties acting in their own self-interest result in an outcome worse than if they had both cooperated.

Two prisoners A and B involved in one criminal event were interogated separately without communicating with each other. The police offers each prisoner two options: betray the other one by testifying that the other committed the crime, or stay silent. The results will be:

1. A and B both betray each other, each of them serve 5 years in prison.

2. A betrays B and B remains silent, A will be free from charge and B will serve 10 years in prison (and vice versa).

3. A and B both remain silent, then each of them serve 2 years in prison.

The result of this game is that both prisoners choose to betray each other regardless whether the other party betrays or remains silent, to maximise his own self-interest. Therefore, they both serve 5 years in prison. Should they cooperate and both stay silent, they would have been charged 2 years in prison for each.

Agents in this market

After a five-year bull run, Melbourne’s property market is finally cooling.  Even though there is still price increase reported for some area, the number of buyers is found less than what is used to be accross the whole metropolitan suburbs. Record shows that the market for standalone house, townhouse or unit is definitely not a buyer’s market yet, since there are still multiple buyers for each property and those buyers will buy for the right price. However, the market is no longer a strong seller’s market either. Buyers’ confidence and motivation is low comparing with 2 years ago. Therefore, this market is a soft seller’s market.

In this market, buyers have more negotiation power then the past. The agent-vendor has more stress to take a lower offer. For the agent, selling with a good price (2017 price) with good terms is desirable. However, generally speaking it may take longer time to achieve it in this cooling market. In most cases, this does not produce much more commission for the agent then selling the property for an average price (2018 price). But the longer process and stress the agent needs to face can be daunting. The better scenario for the agent is selling with an average price but quickly. In this case, the agent will not lose reputation by producing a price reflecting the market condition. The agent can collect the commission and the vendor is still willing to sell for that price then move on. The worst case is no sale, the agent worked for nothing and the vendor still has to deal with the marketing cost and the emotional stress during and after the selling process.  

Agent vs prisoner

In this cooling market, a soft seller’s market, agents are more or less in the position of “prisoners”. The easiest for an agent is to “betray” others by getting the asking price down to achieve an easier sale. Assuming there are a number of similar properties for sale and there are a number of buyers for those properties.

1. All agents “betray” others by reducing the asking price in order to achieve an easier sale with a 2018 price.

2. Some agents “betray” others by getting the asking price down to achieve an easier sale and other agents refuse to reduce their selling price. This will leave other agents in the worst position with no achievement but loss.

3. All the agents cooperatively defend the selling price until making a sale, it is most likely all the properties will be sold for a good price (close to 2017 price but less, due to less competition). 

According to Game Theory, agents in this situation are in the Prisoner’s Dilemma. Hence the result will be all agents try to reduce the selling price to make an easy sale.

Even though the real market is not perfectly the same as what it is assumed here, the observation has suggested that more agents have managed to get the selling price down to make a sale as long as there are multiple similar properties on the market. In another word, the Prisoner’s Dilemma does play in this market.

In another aspect, there are agents who understand the evolution of the market and the Prisoner’s Dilemma, still achieve good price for their vendors by avoiding the Dilemma.

Contact us to book in a consulting session (https://www.realestatelogic.com.au/) .