ABSTRACT
This study develops a price floor model to elucidate the profound impact of demand uncertainty on pricing strategies within the real estate market. We demonstrate that profit-maximizing firms, when setting both supply quantity and a predetermined price floor before demand uncertainty is fully resolved, inadvertently contribute to downward price rigidity. This phenomenon is particularly evident during periods of slack demand and low construction costs, resulting in house prices exhibiting less volatility than actual demand fluctuations. Through a comprehensive grid search analysis, our findings robustly confirm that this observed asymmetric inertia is fundamentally driven by the exceptionally durable nature of real estate assets. The economic and policy implications of such price rigidity are substantial. Specifically, it suggests that the effectiveness of monetary easing during economic recessions might be significantly hampered. This delay can stem from the inherent stickiness of prices, but also potentially from policymakers' reluctance to implement more aggressive or timely interventions in a market that appears less volatile on the surface.
Keywords
price rigidity, downward rigidity, house markets.