Sellers & The Prisoners Dilemma
For the past few decades the housing market has been a very scary place to venture into. A couple of years ago I discussed with my parents whether we were going to buy a new home and move to a new location, and out of fright they decided that this wouldn’t be the most financially stable decision, especially with all three kids in college. When you think of the frightening consequences of entering said market, you often think of it only from the buyers side. This article highlights that nowadays it isn’t actually the buyers who are scared but the sellers (who are also the buyers). This uproar in sellers being hesitant is affecting the market and the supply of homes is decreasing. The author of the article points out that sellers find themselves in a prisoners dilemma when selling their home, they don’t know whether to sell or not sell. They can sell their home but increase the supply, but when buying a new home they may find themselves in a shortage of homes if the other homeowners do not sell as well. The possible results the seller may end up with is having the same home, buying an expensive home due to supply or buying a desirably priced home. The dominant strategy is not selling your home, thus the housing market becomes stuck in a cycle of shortage. The author points out that the only way to escape this dilemma is to construct new homes, however this is a extremely hard task as land is being filled up and construction costs are high.
The market for housing is unique as the seller’s are also the buyers. This brings up a particularly interesting case of the prisoners dilemma. There are few other markets that have this type of setup. The seller must depend on other sellers to make their decision because ultimately they become the buyers themselves. This case of the prisoner’s dilemma is created due to weak connections. If the owners of the home were connected via a strong connection and were in the same social network they would be able to communicate their desire to sell their homes to one another. However, this is not the case which creates the dilemma that ultimately leads to no one selling. Another example of a market with this setup and same dilemma is the used clothes market. A person must decide whether they should sell their clothes to Plato’s Closet or not. However, their decision depends on the supply of available clothes and that is based off of whether other sellers are going to sell their clothes. People are scared that once they transform into the buyer they will find themselves with a small supply of expensive clothes to buy. While clothes are not as life or death as a home is, the same problem arises leading to no one selling because they are scared of their fate as buyers. This type of market scares off sellers before they even have the chance to become buyers.