Price fixing is an illegal action which was defined in Ron Withers blog , Price Fixing: Un-American.........What Say Ye?
Here is something that is starting to pop up online. Horizontal Price-Fixing in Cyberspace This is a great example what can take place in cyber space. This article talks about how one company or person can manipulate the general public by comments on their web site stating and slandering a certain industry. This certain web site and the people behind it would make you believe that everyone in this industry can't be trusted, that their pricing is too high, and that they would hide costs unknown to the average consumer. But the sad thing behind this is that this is their opinion, because not "everyone" in any one type of industry would be like this. It comes down to a select few that would be guilty of this. But these companies would try to bring down an industry attacking them in any negative tone, even if they have some proof from the media and news articles. What this group(s) fails to show is the fact that this is not "everyone", but again, a select few.
There is sometimes another agenda when it comes to marketing a "flat fee" model. These companies can actually use this to their benefit and team up with each other. To cut down the other side of the competition which would basically pit them against the general public, making that certain industry look like they all do this. Now, this could stir up feelings and possibly bring more to their site. In either case, they don't care what happens. It's basically like throwing an open bottle of fire ants in the middle of a crowd and not caring who the ants attack. The bottom line is to get their specific model accepted by society, but to also get noticed. As long as they can do this, they will profit from this. Will the consumer do better because of this, not always. This was described above. And another theory which can happen because these so-called price fixing models seem to be honest is that they can create behind- the-scenes conspiracies. Meaning that they set up a certain model not caring if it fails or not, but by profiting if someone comes along and wants to buy their model. This is the scariest of all scenarios. And Bill Gates is someone that can swoop down to buy something like this and argues for these certain points in the chapter of his new book titled "Frictionless Competition". Imagine what would happen then. Have you ever seen an atomic bomb dropped?
This brings me to the real estate and mortgage industries and how this can affect us. Let's take the real estate industry as an example.
The quality question will recur, though, as I discuss the competition issues, for combating the fear of fraud can demand investments in reputation heavy enough to discourage entry. My focus instead, will be the fact that, when competitive rivals, as well as customers, also have rapid access to information about each others' pricing and rapid ability to respond, they may be able to take advantage of it to reach and police anticompetitive coordination.
There are many arguments for each side. But ponder this thought. Questioning why someone would never blink at a decorators fee of $10,000 for planning a new living room or question a charge of $450 per hour from their attorney chokes when confronted with a bill for five percent of the sales price for rapidly and efficiently selling their home, perhaps even at a much higher price than the seller or a flat rate agent might have achieved.
Here is a great point to think about: Any commission job requires a lot of dead-end hours for every minute that results in a profit. This is just my opinion, but would you get the same service from a discount broker charging a flat fee? The discount broker wouldn't be able to advertise as much or spend as much time marketing your house because their budget wouldn't call for it. These models have been around for a decade now. Sure, they exist, but does it sell a house quickly enough. I have heard of many clients cry stating that they missed a bubble or so, because their realtor didn't market their house. Guess who, the discount broker, because there wasn't enough profit in it. Their time and resources were limited because of their profit.
Again, as Ron Withers pointed out in his current blog, Price Fixing: Un-American.........What Say Ye?, these same real estate discount models have also been in the mortgage industry for about the same time. There 100's and 1,000's of good to excellent loan officers and lenders that would not fit this price fixing model. The same would apply as it would with the real estate discount broker's model. What happens on the mortgage side is that since the lender will be paid a flat fee, they will not push for the tougher loans to close. I hate to say this, but there is that old saying.... "time is money".
Let's look into the life of a lender that would come across a few examples if they were allowed to charge what they thought was fair. Especially for the fact that everything would be disclosed to the client, would be used in each example.
•1. Loan officer A: This lender has a tough deal that originally started with $5,000 in gross profits. Even the seller was contributing $2,000 to the closing costs. The client was told from the get go that they needed to pay off about $4,500 in collection accounts in order to close. He had only $5,500 to spend and not a penny more. With those collection accounts and his closing costs, he would have needed $9,500. But he told the lender that 2 of the collections totaling $4,000 have been paid off already. As they get closer to settlement, he is finding out that these collection accounts were never paid off, at all. His ex was supposed to have taken care of them. He now needs $9,500 to pay for these collection accounts and his closing accounts with down payment. Its 24 hours from closing and the lender has a decision to make. He makes a quick decision to basically make nothing on the deal and do a lender credit, which a lender can do even if they aren't getting YSP. He will be paying for his closing costs so he can pay the collection accounts at closing himself. After all said and done, this loan officer and the lender were lucky to make a total of $500 on this transaction. But thank his lucky stars that in example number 1, he at least made something that would carry him and the lender over into a positive mark.
•2. Loan officer B: This person has the same deal on his plate as did loan officer A in example # 3. Well, it doesn't take him long to decide that he would have to let this deal go and not be able to help this buyer. Why, he needs to move onto the next deal to at least get his flat fee for the next transaction. If he decided to take that particular client on, it would have taken more time which could have cost him a few more transactions at a flat fee or rate. And example # 3 happens more than you think and is living proof within the loan officers that are true professionals. Just the same many realtors are to their profession.
And for a closing sake of argument, Christine Adler sums it up best when she wrote Being aware of your thoughts. Thoughts can be a powerful tool. But so can those thoughts that are perceived as facts and not opinions.
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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc
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We started posting wholesale par rates awhile back, but the format sucked. We're getting ready to evolve again with an embedded chart for these daily posts, instead of in a post.
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Jeff:
Wow! Where did you find that paper on Horizontal Price Fixing? The last four lines were potent:
Business students are taught explicitly how to put prices up to where they would be if they were conspiring with their competitors, but in a way that makes it difficult for courts to infer an agreement so they will not land in jail. As commerce moves to cyberspace, so does the potential for anticompetitive coordination. Coordination will take new forms, so antitrust scrutiny must adapt to these developments and find ways to identify the “agreements” reached there that the law can remedy.
In plain words, cyberspace warps the process of price checking and fixing and provides the perfect cloak for the intentional price fixer (online advertising). One could argue that it is just "good marketing copy" when in reality it is a carefully structured plan to fix the price of a market.