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Are Prices ‘Sticky’ Online? Market Structure Effects and Asymmetric Responses to Cost Shocks in Online Mortgage Markets

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Author Info
Maria Arbatskaya (Emory University)
Michael R. Baye (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

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Abstract

We analyze daily mortgage rates posted by online lenders at the price comparison site, Microsurf. While cost shocks occurred almost daily in our sample, quoted mortgage rates are surprisingly rigid: Only 16 percent of the posted rates represent changes. However, firms that adjusted rates in response to cost shocks did so quite rapidly; about 98 percent of a cost shock was passed through within two days of the cost shock. Duration analysis reveals that the observed rigidity in rates systematically depends on market structure: Online mortgage rates are 30 to 40 percent more durable in concentrated markets than in markets where there are many competitors. We also find that rates posted online tend to exhibit downward stickiness; rate adjustments in response to cost increases are about twice the corresponding adjustments for cost decreases.

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Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2004-01.

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Date of creation: 2004
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Handle: RePEc:iuk:wpaper:2004-01

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Related research
Keywords: mortgage rate price adjustment price rigidity price dispersion

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
M3 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising

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  1. Dennis W. Carlton, 1987. "The Rigidity of Prices," NBER Working Papers 1813, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Rotemberg, Julio J & Saloner, Garth, 1987. "The Relative Rigidity of Monopoly Pricing," American Economic Review, American Economic Association, vol. 77(5), pages 917-26, December. [Downloadable!] (restricted)
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  3. Sam Peltzman, 2000. "Prices Rise Faster than They Fall," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 466-502, June. [Downloadable!] (restricted)
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  4. Michael R. Baye & John Morgan & Patrick Scholten, 2004. "Price Dispersion in the Small and in the Large: Evidence from an Internet Price Comparison Site," Working Papers 2004-03, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
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  5. Daniel Levy & Mark Bergen & Shantanu Dutta & Robert Venable, 2005. "The Magnitude of Menu Costs: Direct Evidence from Large U.S. Supermarket Chains," Macroeconomics 0505012, EconWPA. [Downloadable!]
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  6. Ausubel, Lawrence M, 1991. "The Failure of Competition in the Credit Card Market," American Economic Review, American Economic Association, vol. 81(1), pages 50-81, March.
  7. Neumark, David & Sharpe, Steven A, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 657-80, May. [Downloadable!] (restricted)
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  8. Warner, Elizabeth J & Barsky, Robert B, 1995. "The Timing and Magnitude of Retail Store Markdowns: Evidence from Weekends and Holidays," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 321-52, May. [Downloadable!] (restricted)
  9. Fisher, Timothy C. G. & Konieczny, Jerzy D., 1995. "The relative rigidity of oligopoly pricing," Economics Letters, Elsevier, vol. 49(1), pages 33-38, July. [Downloadable!] (restricted)
  10. Michael R. Baye & John Morgan, 2001. "Information Gatekeepers on the Internet and the Competitiveness of Homogeneous Product Markets," American Economic Review, American Economic Association, vol. 91(3), pages 454-474, June. [Downloadable!] (restricted)
  11. Kashyap, Anil K, 1995. "Sticky Prices: New Evidence from Retail Catalogs," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 245-74, February. [Downloadable!] (restricted)
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  12. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September. [Downloadable!] (restricted)
  13. Rosenthal, Robert W, 1980. "A Model in Which an Increase in the Number of Sellers Leads to a Higher Price," Econometrica, Econometric Society, vol. 48(6), pages 1575-79, September. [Downloadable!] (restricted)
  14. Lach, Saul & Tsiddon, Daniel, 1996. "Staggering and Synchronization in Price-Setting: Evidence from Multiproduct Firms," American Economic Review, American Economic Association, vol. 86(5), pages 1175-96, December. [Downloadable!] (restricted)
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  15. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 305-39, February.
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  16. Akerlof, George A & Yellen, Janet L, 1985. "A Near-rational Model of the Business Cycle, with Wage and Price Intertia," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 823-38, Supp.. [Downloadable!] (restricted)
  17. Richard L. Haney, Jr., 1988. "Sticky Mortgage Rates: Some Empirical Evidence," Journal of Real Estate Research, American Real Estate Society, vol. 3(1), pages 61-73. [Downloadable!]
  18. Howard L. Roth, 1988. "Volatile mortgage rates - a new fact of life?," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 16-28. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Michael R. Baye & John Morgan & Patrick Scholten, 2006. "Information, Search, and Price Dispersion," Working Papers 2006-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  2. Leo de Haan & Elmer Sterken, 2005. "Asymmetric Price Adjustment in the Dutch Mortgage Market," DNB Working Papers 061, Netherlands Central Bank, Research Department. [Downloadable!]
  3. Emin M. Dinlersoz & Pedro Pereira, 2006. "On the Diffusion of Electronic Commerce," Working Papers 13, Portuguese Competition Authority. [Downloadable!]
    Other versions:
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