What is market allocation in real estate: An overview

In the United States, real estate brokers are key players in buying, selling, and renting properties. However, like in many industries, there are laws and regulations to ensure fair competition. For instance, one of the things brokers can’t do is engage in market allocation, which can violate these rules. But, what is market allocation in real estate? 

This article will explain what this strategy is, why it’s illegal under federal law, and how it affects the real estate market.

So, what is market allocation in real estate?

Real estate market allocation occurs when real estate brokers or companies agree to divide the market or client base among themselves. This can happen in several ways:

• Geographic allocation: Dividing territories among different real estate firms so that each firm operates only in a designated area.
• Customer allocation: Agreeing to serve specific types of clients or categories of properties, such as commercial properties vs. residential properties, or high-end vs. budget properties.
• Service allocation: Specializing in particular services, such as property management vs. property sales, and not competing in the other’s chosen service area.

Now, your question would be: why do they do it? These allocation methods are generally pursued to reduce competition and stabilize or increase profits by controlling certain market segments. 

What actually happens is that such a division leads to higher prices and reduced choices for consumers.

What is an example of market allocation?

An example of how real estate agents and brokers promote market allocation is through customer allocation. They may decide which types of clients they will handle in the area. For example, one firm may exclusively handle luxury property buyers, while the other focuses on first-time homebuyers. This type of agreement reduces competition, as each firm effectively monopolizes a specific segment of the market.

Read more: How a website can help real estate brokers?

Is market allocation legal in the United States?

No, market allocation is illegal under U.S. federal law. The Sherman Act explicitly prohibits any form of agreement between competitors that restrains trade or commerce, including market allocation. These illegal agreements can include divisions based on location, customer type, or property type. 

It’s worth mentioning that the Clayton Act came after the Sherman Antitrust Act. This law aimed to promote labor rights and crack down on shady business practices such as monopolies and price-fixing. Back then, big corporations, especially in the real estate industry, were using mergers, exclusive deals, and aggressive pricing to wipe out competition. The Clayton Act was introduced to put a stop to these unfair tactics and regulate corporate behavior. 

Today, there can be no arrangements between competitors to divide markets or customers. Such agreements restrict free competition and harm consumers. 

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) vigorously investigate and prosecute cases of market allocation to preserve competitive market conditions. Such practices are considered a form of antitrust violation because they undermine the free market, restrict competition, and lead to higher prices and reduced choices for consumers.

This market allocation rule is designed to protect consumers from artificially inflated prices and reduced choices resulting from a lack of competition.

What can be the consequences of market allocation?

When real estate brokers or companies engage in market allocation, they create an illegal market. This lack of competition can lead to several negative outcomes in the real estate market. 

When brokers or companies agree to divide markets among themselves, it often results in price fixing, where they set prices rather than compete. This can artificially inflate prices, as there’s less pressure to offer competitive rates. Additionally, bid rigging can occur, where competitors conspire to control bidding processes, ensuring certain outcomes that favor them. 

Group boycotting can also become a tactic, where brokers refuse to deal with certain individuals or companies, further limiting competition. Keep in mind that less competition means fewer choices for consumers, whether in terms of price, service, or quality.

Altogether, these practices create a less dynamic market. The lack of competition stifles innovation and can result in a market that doesn’t serve the best interests of buyers, sellers, or renters.

Violating these antitrust laws can result in severe legal penalties, including hefty fines and imprisonment for individuals involved. These penalties serve as a deterrent to prevent businesses from engaging in unfair practices.

Key takeaway

Market allocation agreements in real estate are a serious antitrust violation. By understanding what it is and why it’s illegal, consumers and businesses can better navigate the real estate industry and promote fair competition. The Sherman Act and other antitrust laws exist to protect consumers and ensure that real estate businesses compete fairly, benefiting everyone involved.

Written by Ramona Sinha. November 7, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.