Transaction Costs, Conveyancing Services and Markups: Entry and Competition for the German Notary Profession

The purpose of this paper is to analyze the entry effects on competitive conduct (markups) for German notary profession that only deals with real estate transactions. I address three issues. First, I show empirical evidence of positive relationship between legal fees (transaction costs) and regulation level on the conveyance profession. Second, I estimate the entry impact on the current competitiveness in Bavarian notary profession: I estimate the markup reduction of additional firm entry using the Bresnahan-Reiss Ratio. Lastly, I analyze the effects of lowering the markups on the number of existing geographical notaries. The main results can be summarized as follows. First, I show a positive statistical evidence between conveyancing fees and regulation level for Germany. Second, I find that entry does affect conduct in the notary market. Empirical results indicate that the current Bavarian notary profession imposes net markups in the range of 53 to 116 percent over the competitive benchmark. Third, the geographic coverage would not decrease significantly if the net mark-ups were to be lowered: A large reduction in net mark-up is met with a slight decrease in the number of geographic districts that are covered. For example, if the net markups are reduced by 10, 20 and 30 percent then the number of geographic districts covered would decrease only by 1, 3 and 4 percents respectively. Consequently, this paper does support the argument for a geographic entry restriction with high markups to ensure a high geographic coverage.