Brokerage

Brokerage

The word brokerage usually refers to a brokerage firm or a broker, a person who acts as an intermediary between buyer and seller. Theoretically, a matchmaker in marriage arrangements is also a middleman, just as a real estate agent or the traditional stock market broker. Online brokerage has gained in prominence over the years. Broker services embody the principle-agent relationship and customarily entail a commission.

The principle-agent relationship refers to the fact that the principle and agent fail to necessarily share the same interests. In the corporate world, the problem may arise if a given manager or even CEO (Chief Executive Officer) acts in a way that fails to benefit the owners (shareholders). In real estate, the dilemma would arise if a realtor wants to sell a property fast and thus at a lower price, while the proprietor is interested in a higher selling price despite the time that it may take.

In Quebec, some of the main real estate agencies are Remax, Royal LePage, La Capitale and Groupe Immobilier Londono. Condominiums, houses and other properties can also be sold by the owner him or herself, using Proprio Direct. The commission charged ranges from approximately 4 to 7% depending on the agent. Although some commercial properties can be found in regular MLS listings (sponsored by the Canadian Real Estate Association), Quebec Commerce specializes in buying and selling of businesses in the province.

Chen & Hitt (2002) examined the switching costs and ability to retain customers associated with diverse online brokerage firms. The importance of the inquiry is underscored with the importance that customer retention has in the contemporary, highly competitive business world. The authors found that firms differed considerably, but that service quality and product variety helped businesses retain clients and create brand loyalty in their study.

It's hard to find a good broker. Photo : Elena

Benjamin et al. (2005) covered 1,700 observations to establish the liaison linking Internet usage to residential brokerage. The analysts discovered that with greater Internet use, both gross and net profits were larger, while net margin was smaller. In their sample, online presence was also positively associated with consumer affiliation.

Womack (1996) wonders whether brokerage analysts’ recommendations in fact serve a positive, constructive function. He concludes that security analysts are exceptionally good at timing the market and picking stock. However, there appears to be a post-event discrepancy between pre-recommendation and actual values in pricing.

Finally, in a review article by Yavas (1996), brokerage literature is decorticated and future research suggested. For example, Walrasian auctioneer (perfect competition where traders can sell and buy any quantity at market price) is essential to achieve efficient market allocation. However, the author explains that the argument rests on the perfect information premise, which apparently rarely holds in the housing and other markets.

References:

    Benjamin, J. D., Chinloy, P., Jud, G. D. & Winkler, D. T. (2005). Technology and real estate brokerage firm financial performance. Journal of Real Estate Research, 27 (4): 409-426.

    Chen, P-Y. (S) & Hitt, L. M. (2002). Measuring switching costs and determinats of customer retention in Internet-Enabled Businesses: A study of the online brokerage industry. Information Systems Research, 13 (3): 255-274.

    Womack, K. L. (1996). Do brokerage analysts’ recommendations have investment value? The Journal of Finance, 51 (1): 137-167.

    Yavas, A. (1994). Economics of brokerage: An overview. Journal of Real Estate Literature, 2 (2): 169-195.