Market power and urban housing development

Abstract

This paper investigates the relationship between market power and urban housing development in a two-period, partial equilibrium model of a durable rental housing market with a fixed stock of homogeneous land, a convex housing construction technology, and no externalities. We contrast the planning solution and the monopoly solution. Since we employ social surplus analysis, the competitive equilibrium coincides with the planning solution. Thus, we contrast the competitive equilibrium and the monopoly solution. On a priori grounds, one expects less housing to be produced under monopoly than under competition. The monopolist can produce less housing by constructing housing at lower density, holding land off the market, or developing his land later. We show that the monopolist: (i) will never hold land off the market for both periods, (ii) may develop either a higher or lower proportion of her land in the first period than under competition, and (iii) in both periods will construct at lower density than under competition.