Wednesday, 9 March 2011

Imperfect Information: Another Consequence for Rental Markets

In an earlier post I explained various problems with the hidden, unwarranted assumptions in standard Free Market fundamentalist denunciations of rent controls. Namely, that no market is perfectly competitive because, no matter how many firms are in a given market, they won't all be selling the same good and buyers don't know everything about the product - that is to say that buyers have imperfect information.

A lot of the really cutting edge work in economics right now is being done by theorists who assume imperfect information or information asymmetries (some people knowing more than others). Joseph Stiglitz is one such person and has provided an example of how a firm could raise prices to a very high level even in a very competitive market:
In some cases it has been shown that even though there are many firms, prices might be raised to the monopoly level even when search costs are very small. To see why, consider a case where all firms charged the same price. If any firm were to raise its price just a little—by an amount less than the cost to customers of switching to another firm—that firm would lose no customers. Thus, so long as the price is below the monopoly price, it pays that firm to raise its price by a little. But it pays each firm to do so: all raise their prices—and the process continues until the monopoly price is reached.
So, a landlord could raise the rent $5 above the "best price" realizing that searching for a cheaper apartment would cost a tenant $5.45. Several other landlords could do likewise. All these landlords could do this again, realizing that searching for another rental unit would cost a person $5.45 (in spent energy and time). These landlords could continuously do this until rents were at obscenely high rates per month.

The costliness of finding a new home would hurt poorer people in particular, given their more limited resources and (in quite a few cases) smaller social networks means it'd be more difficult for them to find new apartments. Furthermore, since few if any property developers build rental units for the "low income rental market", there would already be less competition in that sector.

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