(MONEY Magazine) – Sheridan, Wyo. is a small town where everybody knows everybody else's business. "A good-ole-boys town," as Mary Valdez likes to say. So two years ago when Valdez left Sheridan's biggest real estate firm to launch You Win Realty, the move caused talk. Ugly talk.

At first, Valdez heard it secondhand—tall tales of her supposedly unscrupulous professional behavior. Before long, fellow agents were giving her the silent treatment at house showings. "I'd say, 'Hi, how are you?' and they wouldn't respond," she says. "They wouldn't even say hello."

Then there were the harassing phone calls—so many, in fact, that Valdez kept a log. One caller said she was "starting a war," another that she was "sabotaging" the local realty industry. Yet another, ridiculously, threatened to report Valdez to the Federal Trade Commission. Ultimately, it got to her. "I'd come home and cry at night and ask my husband, 'What am I doing?'"

And what was Valdez doing? Why, she had the temerity to charge a 4.5% commission to sell a house instead of the 6% favored by her rivals.

Of course, there's nothing revolutionary about an upstart competing on price. That's Econ 101. Problem is, the brokering of homes in this country has never fit neatly into textbook economics, despite being a $65-billion-a-year industry. Experts have spent years trying to explain how the 6% commission—5% in some regions, 7% in others—has survived while brutal competition has shaken up every other sector of the economy. (A moment of silence, please, for the 8.5% mutual fund sales load and the $250 commission for trading stock.) In fact, the cost of selling a home hasn't just held steady. The dramatic runup in home prices means the actual dollars spent on commissions have gone through the roof.

A backlash was inevitable. With the Multiple Listing Service (MLS)—real estate's version of a stock exchange—now available on countless websites, buyers and sellers are doing an end run around high-priced agents. All around the country, firms like Assist-2-Sell, Foxtons, Help-U-Sell and ZipRealty—charging between 2% and 5% for a range of home-selling services—are chipping away at the 6% monolith.

And yet the realty establishment continues to resist competing on price—ostracizing discounters, lobbying for government protection and hiring "coaches" to help them talk consumers out of wanting lower commissions. Valdez's experience offers one reason why 6% commissions have persisted. After all, no agent wants to become a pariah. "I guess I was either very brave," she says, "or very stupid."

You'd expect a maverick to get a warmer reception in Sheridan County, a breathtaking stretch of mountains, forests and rolling ranchland near the Montana border. The town of Sheridan became the part-time home of "Buffalo Bill" Cody in the 1890s and today is a place where you can buy spirits at a drive-through liquor store and cruise the interstate at the loosely enforced 75-mile-per-hour speed limit. Cowboys rub shoulders with tourists on Main Street, and lately there's been an influx of wealthy retirees bidding up local land and home prices. The out-of-towners are lured by the clement weather, the absence of state income taxes and a new luxury golf community at the base of the Big Horn Mountains.

By her own description, Valdez, 43, is one driven and competitive woman. As a kid she set up a milk shake stand when everyone else was offering lemonade, and even when she was in high school, she knew she wanted to sell homes for a living. "At the end of senior year, you're asked what you'll be doing in 20 years," she recalls. "I said real estate agent."

Married and a mother at 18, then a part-time waitress when her own kids hit their teens, Valdez didn't make good on her prediction for almost two decades. But just six years after joining the local ERA realty shop as a 35-year-old rookie, she was earning $100,000 a year. These days Valdez logs on to a website called EmpowerMe!Online each morning and drives around town to the words of positive-thinking gurus on her SUV's sound system.

Nasty phone calls and backbiting, in other words, weren't going to put Valdez off—though there was plenty of that. Stephanie Willey, a former You Win agent, says that since leaving the firm, "I've been getting high fives from other agents. They're so glad I'm not working for her anymore."

What did worry Valdez, though, were rumors that other agents were threatening not to show properties listed with You Win—that they would, in effect, boycott her listings. In fact, one of Valdez's clients, Nita Siebert, says a broker admitted that she wouldn't show Siebert's house because of the discounted commission. (Never mind that such boycotts, without the cooperation of buyers, violate agents' own professional code of ethics as well as their fiduciary duty to customers.)

Valdez had come face to face with a phenomenon that industry critics have been griping about for years. Economists such as Norm Miller of the University of Cincinnati and Abdullah Yavas of Penn State allege that the survival of the 6% commission is due in large part to the boycotting of discounters by full-price agents. It's a particularly difficult behavior to root out. Because residential real estate sales generally require collaboration between competing firms, back-room deals aren't necessary to artificially prop up prices. Peer pressure and a modest grass-roots whisper campaign are generally enough to keep agents in line.

The Internet, however, has eroded the effectiveness of such tactics. With 70% of home shoppers now surfing their local MLS on the Web, any agent who tries to boycott a discounter like Valdez risks having to explain to clients why they weren't shown, say, that little colonial on Maple Lane that looked so perfect online. As Valdez puts it, "Buyers are smart. If their agent won't show them a property they want to see, they're going to call the listing agent."

Smart or not, most people have a tough time getting price concessions out of traditional agents. (For negotiating strategies you can use, see the box on page 108.) Ask about the strange resilience of the 6% commission, and agents invariably insist that "all commissions are negotiable." But ask for a lower rate and you are likely to get an earful about their heavy cost burden.

It's true that almost nobody keeps the whole 6%. For starters, half a listing agent's commission goes to the buyer's agent, and then the agents divide their shares again with their real estate offices. For beginning agents, that division is typically fifty-fifty, but more experienced, top-producing agents can command 75% or more. Then there's the high cost of marketing—everything from newspaper classifieds to glossy supplements that come in the Sunday paper.

All these costs are real, but they're not the whole story. The nation's top eight brokerage chains grew their average sales per office by 28% in 2003, according to Steve Murray, a real estate consultant and editor of Real Trends. Meanwhile, Cendant—the nation's largest realty company and home of the Century 21, Coldwell Banker and ERA brands—reported a 35% increase in real estate-related profits during the second quarter of 2004. Even in Sheridan, where You Win has taken away a chunk of listings, ERA and many independent offices are reporting a record year.

The industry has bad years too, but even then its complaints about high costs don't stand up to scrutiny. That's because an industry that does not compete on price—airlines before deregulation, say—is one that's never been forced to think creatively about costs. Why, for example, do realty firms spend 90% of their ad budgets on expensive print media when two-thirds of customers are shopping for homes and agents online?

In fact, the 6% commission is as likely to be a cause of high operating costs as a solution to them. Penn State's Yavas contends that the absence of price competition has led to too many agents chasing a limited number of clients. The membership of the National Association of Realtors (NAR) recently topped 1 million, which means there's now about one agent for every six homes sold in the U.S. annually. If you add in the licensed real estate professionals who are not NAR members, the ratio is closer to one agent for every three homes. By comparison, the typical agent in England—where commissions are 2%—sells 40 to 50 properties a year. Given those figures, it's not surprising that U.S. agents expend enormous resources fighting over buyers via expensive print advertising, which is more effective at attracting customers to the real estate firm placing the ad than at selling the homes featured therein.

Whether widespread discounting is imminent or not, there is a palpable sense of unease among rank-and-file agents. At a recent conference sponsored by realty trade publication Inman News, brokers and agents swapped war stories about how they've been forced to trim commissions in order to compete with discounters. During a panel discussion, Harley Rouda, the CEO of Real Living, a big Midwest brokerage firm, suggested that the situation had grown so dire that it was time for traditional brokers to take political action. He urged them to lobby state real estate boards to de-license some existing agents and issue fewer licenses to newcomers to the business. The industry, he said, would be better off "if half of the realtors were gone and all of us were not competing day in and day out with people who compete only on price." It may have been the biggest applause line of the conference.

Rouda isn't the first to suggest using real estate agents' political clout to limit competition. Many state governments have already enacted rules making it harder for consumers to extract discounts from their brokers. For example, one of the easiest ways for buyers or sellers to catch a break on commissions is to find an agent through a website or airline that's partnered with a realty firm. The real estate broker agrees to pay the partner a third of any commission the referral generates. The partner then kicks back a share of that referral fee—sometimes thousands of dollars' worth—to the consumer in the form of cash, frequent-flier miles or gift certificates. Airlines like American and Delta, and websites like HomeGain and LendingTree currently have deals with thousands of agents.

Sounds good, right? Problem is, there are 15 states that prohibit rebates to consumers on the grounds that no one without a realty license—in other words, buyers and sellers—should be able to share a commission. And consumers in the other 35 states will soon be denied some of these deals if the NAR gets its way. The trade organization for realtors and the guardian of the MLS, the NAR has proposed rules that would prevent websites like ZipRealty from getting the referral fees it's now sharing with consumers. Another NAR proposal would allow sellers' agents to withhold their listings from discounters and other Web brokers that display the MLS online.

NAR vice president for public affairs Steve Cook acknowledges that agents have "a fiduciary responsibility to their client to sell their property as the client wishes." Well, MONEY asked, why would clients wish to limit the number of websites on which their homes are marketed? Cook's reply: "I don't know." The NAR has delayed the implementation of the rules while the U.S. Department of Justice investigates whether they amount to an antitrust violation.

Individual agents, meanwhile, are developing their own strategies for taking on the discounters. In Sheridan, nearly everyone has seen Valdez's billboards or heard her radio commercials, so rivals have been forced to adapt. "Mary made sellers more conscious of commissions," says Donna Vineyard of Tongue River Realty. "I offer 4.5% now more than I used to." Trying to hold a firmer line, Anne Zimmerschied of Powder Horn Realty—like other embattled agents across the country—has sought help from a real estate "coach." These advisers have been around for years, helping agents polish their sales techniques; now a large part of their business is offering agents guidance on protecting their full-price commissions. And they don't come cheap, some charging $3,000 for a three-day seminar.

What exactly are these coaches teaching? One of them, Jim Gillespie of Temecula, Calif., told MONEY that he advises agents to use the specter of boycotts to dissuade sellers from listing with discounters. Bernice Ross, CEO of Austin-based RealEstateCoach.com, advises agents to deflect requests for lower commissions by saying, "If you hire an agent who can't even negotiate a full commission on their own behalf, how effective do you think they will be in negotiating the maximum price for your property?" Ross advises agents to then "shut up and wait for the seller to respond. They generally have a 'deer-in-the-headlights' response." No doubt they do.

Ross also encourages agents to present potential customers with stats showing how often they sell homes for more than asking—and to compare the figures to those of discount brokers in town. She admits, however, that she actually has no data to show that full-service brokers typically get better prices than discounters. A comparison of recent sales shows that they certainly don't in Sheridan; and economist Miller says he knows of no evidence that full-commission brokers in general land higher prices.

That isn't surprising. Much as sellers may want to get top dollar, agents are naturally inclined to price properties to sell quickly. After all, an extra $10,000 in sale price means only a few hundred dollars in commission; it is far better from the agent's point of view to close a sale, pocket the commission and move on to the next deal. The conflict of interest between sellers and agents was underscored in a recent study of 300,000 listings in Texas by Yavas and two co-authors. They found that when agents sold their own homes, they listed them for 4.1% more than they listed their clients' comparable homes for. And they sold them, on average, for 4.5% more.

Back in Sheridan, price competition does seem to be benefiting consumers. When Rhonda Branscome and her husband wanted to sell their three-bedroom Sheridan ranch house on nine acres, they interviewed several realty firms, including You Win. The agent they ended up hiring, Donna Vineyard, matched Valdez's 4.5% commission. "Mainly, I just went with who I liked the best," Branscome says. "But Donna knew I had already talked to Mary, so she dropped her commission." According to Wilcox Abstract & Title, one of the two big title firms in town, average commissions in Sheridan have fallen from 6% to 5% since You Win opened two years ago. Ironically, Valdez herself isn't getting her piece of the bounty: The salary she's taking is half what she was earning at ERA.

For consumers and agents alike, the $65 billion question is how low commissions can go. Four percent is a good guess for a median, with star agents commanding 6% and bare-bones discounters charging 1% or 2%. How long it takes to get there depends on how much investors put behind companies like ZipRealty and Assist-2-Sell—and on how quickly the likes of Cendant and ReMax respond.

As for the tenacious Mary Valdez, she's so certain lower commissions are the future of real estate that she spent $400,000 to construct a new 4,550-square-foot office building for her firm on Sheridan's main drag, and her husband Doug recently decided to quit his $75,000 job at a mining company to work at You Win full time. And what will Valdez be doing in 20 years? "I'll be selling my franchises," she says, without missing a beat. Full-price agents beware.