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192 PART • Producers, Consumers, and Competitive Markets E XA MPLE 5.9 SELLING A HOUSE Homeowners sometimes sell their homes because they have to relocate for a new job, because they want to be closer to (or farther from) the city in which they work, or because they want to move to a bigger or smaller house So they put their home on the market But at what price? The owners can usually get a good idea of what the house will sell for by looking at the selling prices of comparable houses, or by talking with a realtor Often, however, the owners will set an asking price that is well above any realistic expectation of what the house can actually sell for As a result, the house may stay on the market for many months before the owners grudgingly lower the price During that time the owners have to continue to maintain the house and pay for taxes, utilities, and insurance This seems irrational Why not set an asking price closer to what the market will bear? The endowment effect is at work here The homeowners view their house as special; their ownership has given them what they think is a special appreciation of its value—a value that may go beyond any price that the market will bear If housing prices have been falling, loss aversion could also be at work As we saw in Examples 5.7 and 5.8, U.S and European housing prices started falling around 2008, as the housing bubble deflated As a result, some homeowners were affected by loss aversion when deciding on an asking price, especially if they bought their home at a time near the peak of the bubble Selling the house turns a paper loss, which may not seem real, into a loss that is real Averting that reality may serve to explain the reluctance of home owners to take that final step of selling their home It is not surprising, therefore, to find that houses tend to stay on the market longer during economic downturns than in upturns Fairness People sometimes things because they think it is appropriate or fair to so, even though there is no financial or other material benefit Examples include charitable giving, volunteering time, or tipping in a restaurant Fairness likewise affected consumer behavior in our example of buying a snow shovel At first glance, our basic consumer theory does not appear to account for fairness However, we can often modify our models of demand to account for the effects of fairness on consumer behavior To see how, let’s return to our original snow shovel example In that example, the market price of shovels was $20, but right after a snowstorm (which caused a shift in the demand curve), stores raised their price to $40 Some consumers, however, felt they were being unfairly gouged, and refused to buy a shovel This is illustrated in Figure 5.12 Demand curve D1 applies during normal weather Stores have been charging $20 for a shovel, and sell a total quantity of Q1 shovels per month (because many consumers buy shovels in anticipation of snow) In fact some people would have been willing to pay much more for a shovel (the upper part of the demand curve), but they don’t have to because the market price is $20 Then the snowstorm hits, and the demand curve shifts to the right Had the price remained $20, the quantity demanded would have increased to Q2 But note that the new demand curve (D2) does not extend up as far as the old one Many consumers might feel that an increase in price to, say, $25 is fair, but an increase much above that would be unfair gouging Thus the new demand curve becomes very elastic at prices above $25, and no shovels can be sold at a price much above $30 Note how fairness comes in to play here In normal weather, some consumers would have been willing to pay $30 or even $40 for a shovel But they know that
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