Researchers at Tel Aviv University have uncovered a surprising economic impact associated with the “zero-price effect” in real estate advertising. Their study observed that homes advertised for free on the Israeli classifieds platform “Yad2” garnered fewer clicks, took longer to sell, and fetched lower prices than those listed through paid ads. This discrepancy amounted to an average net loss ranging from 3.5% to 3.8% of the sale price, translating to a financial shortfall of about $12,000 to $13,000 per transaction. The cost of using the paid service was only about $70, highlighting a significant return on investment for those who opted for paid advertisements.
The findings, which will be published in the “Real Estate Economics” Journal of the American Real Estate and Urban Economics Association, stem from research conducted by Professor Danny Ben-Shahar, Director of the Alrov Institute for Real Estate Research at the Coller School of Management, and Dr. David Ash, a research associate at the institute. Their work delves into the nuances of behavioural economics in the real estate market, particularly how biases in decision-making can lead to suboptimal financial outcomes.
Professor Ben-Shahar explained that their study is grounded in understanding people’s irrational decisions influenced by biases such as the zero-price effect. This effect causes individuals to overvalue products or services offered for free. For example, reducing the price of a product from $2 to $1 might slightly boost demand, but making the product accessible can lead to a disproportionate surge in demand. This phenomenon defies rational cost-benefit analysis. The researchers aimed to explore this effect using real-world data, moving beyond laboratory experiments to examine consumer behaviour and its financial implications.
The study also extended to commercial properties listed for rent on “Yad2.” In July 2019, a natural experiment unfolded when the platform switched from a free to a paid posting service while introducing a more expensive premium service. This change allowed the researchers to observe actual transactions where property owners faced new costs for advertising their properties. The shift led many to opt for the more costly premium service, suggesting that the allure of free options significantly diminished when they were no longer available.
Through an extensive analysis of over 15,000 property ads posted by private homeowners from 2014 to 2016, the researchers demonstrated the tangible costs of the zero-price bias. Despite the relatively low cost of premium listings, about 95% of sellers initially chose the free option. However, those who invested in premium ads saw not only a higher number of clicks and inquiries but also faster sales and higher selling prices. Statistically, properties advertised through paid premium services sold for 3.5% to 3.8% more than those listed for free, confirming a substantial financial advantage for those who choose to invest in their advertisement.
This comprehensive study illustrates the significant economic repercussions of decision-making biases in real estate and provides practical advice for sellers aiming to maximize returns in the real estate market. It clearly shows how seemingly minor costs can lead to substantial financial benefits. It underscores the importance of critically assessing the actual cost of “free” services, especially in significant financial decisions such as property sales. The insights from this research contribute to academic discourse and offer actionable strategies for real estate professionals and sellers.
More information: David Ash et al, Zero-price effect and consumer welfare: Evidence from online classified real estate service, Real Estate Economics. DOI: 10.1111/1540-6229.12508
Journal information: Real Estate Economics Provided by Tel-Aviv University