Fairness as a constraint in the real estate market

Community standards, ethical norms, and perceptions of fairness often serve as constraints on pure profit maximizing behavior. Consider the following examples: Most hardware stores refrain from raising prices on snow shovels after a major snow storm, even where short term profits might be increased. Most employers do not lower wages for existing employees, even as unemploy ment in the area increases. Automobile dealerships rarely raise sticker pri ces to cope with the long waiting periods for a popular model. Each of thes e anomalies is consistent with the proposition that firms increase profits subject to fairness constraints. This paper examines perceptions of fairness in the residential real estate industry and explores how community standards affect economic decision-maki ng. The residential real estate industry is unique. One party to the transa ction (the landlord) frames decisions as pure business decisions. The other party to the transaction (the tenant) frames decisions more broadly. While a tenant's choice of apartments is in part viewed as a business decision, tenants consider a broad spectrum of non-business issues, as well. This disjunction between landlord and tenant perceptions can lead to unique ethical quandaries and can explain otherwise anomalous economic behavior i n the industry. The hypothetical case examined in this paper is based on a frequently encountered situation in the industry. The paper concludes with practical suggestions for managers.