Strategic interactions of urban land developers in the housing market

Description

This thesis studies the supply side of the housing market taking into account the strategic interactions that occur between urban land developers. The thesis starts by reviewing the literature on new housing supply, concluding that there are very few studies where strategic interactions are taken into account. Next, we develop a model with two urban land developers, who first decide the quality of housing and then compete in prices, considering that the marginal production costs depend on the housing quality. First, we analyze the price competition game and characterize the Nash equilibrium of the price game. Finally, we examine the first stage of the game and determine numerically the SPNE of the quality-price game.
In the price competition game, our results show that the equilibrium price of an urban land developer is an increasing function of its own quality, while it is a non-monotonic function of the rival's quality. The behavior of the equilibrium profits reveals that, in general, urban land developers gain by differentiating their quality. However, the urban land developer located at the CBD, may prefer to have the same quality than the rival when transportation costs are high by exploiting its locational advantage.
The analysis of the first stage of the game also reveals that, in general, the firms best response is to differentiate their quality and that, in most cases, there are two subgame perfect Nash equilibria that involve quality differentiation. However, the results depend on transportation costs and the quality valuation parameter. For small quality valuations, in equilibrium, the market is not fully covered and, if the unit transportation costs are high, only the urban land developers located at the CBD operates. For higher quality valuations, all the consumers are served. Furthermore, the equilibrium qualities and profits are increasing with quality valuation parameter.

Period	4 Jul 2016
Examinee	Pedro Miguel Moreira Lopes Garcês
Examination held at	University of Évora
Degree of Recognition	PhD