Essays on durability and the Japanese housing market

This thesis consists of two empirical essays on topics in industrial organization. Chapter 1 introduces two essays and describes main results. Chapter 2 investigates an explanation for a phenomenon observed in the Tokyo condominium market during the 1990s–a persistent price deflation and a spike in output associated with land price depreciation in the context of market structure. Though land price and condominium price were highly correlated throughout the 1990s, a divergence in the two series is observed from 1993 onwards. This divergence may be due to imperfect competition between condominium developers or to an appreciation of the construction cost relative to the land cost for the condominium production. In order to address this problem, a dynamic durable goods oligopoly model of the condominium market that incorporates time variant costs is developed and estimated. On the basis of estimates and counterfactual experiments using the estimated model, I get the following results. First, the data provides no evidence of the firms in the primary market having any substantial market power in this industry. Second, the inflation in production cost strengthens the market power of condominium producers; at the same time, its deflation exacerbates the erosion of the market power derived from its durability. Third, the deflation of condominium prices is explained by the increase in production of small firms rather than by cost variations. Chapter 3 focus on the friction in the secondary housing market in Japan. Low volume of transactions in the secondary market has often raised policy concerns in Japan. It not only impedes an efficient allocation of housing resources but also encourages demolition of usable housing structures. The chapter develops the dynamic discrete choice model of durable housing with the transactions cost, quantifies the transactions cost and its effect to Japanese housing market during the 1990s. Using the consumer panel data, the Japan Panel Survey of Consumers, the parameters of the model are structurally estimated. Our results support the stylized fact that sellers in the secondary market in Japan face substantial transactions cost; the households face a transactions cost of about 35.6 million yen for each sale of a housing unit during the 1990s. This amount is worth 0.89 times the average price of a new condominium unit and 5.7 times the average household's annual income. Simulation exercises using obtained parameter values show that the policy to cut the seller's transactions cost in the secondary market is effective in increasing the housing sales volume and raising the home ownership rate. For example, a 50 percent reduction in the transactions cost would increase the volume of sales by about 321 percent and the home ownership rate from 56 percent to 76 percent.