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Search frictions and market power in negotiated price markets

Author

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  • Allen, Jason
  • Clark, Robert
  • Houde, Jean-Francois

Abstract

We provide a framework for empirical analysis of negotiated-price markets. Using mortgage market data and a search and negotiation model, we characterize the welfare impact of search frictions and quantify the role of search costs and brand loyalty for market power. Search frictions reduce consumer surplus by $12/month/consumer, 28% of which can be associated with discrimination, 22% with inefficient matching, and 50% with search costs. Large consumer-base banks have margins 70% higher than those with small consumer bases. The main source of this incumbency advantage is brand loyalty; however, price discrimination based on search frictions accounts for almost a third.

Suggested Citation

  • Allen, Jason & Clark, Robert & Houde, Jean-Francois, 2018. "Search frictions and market power in negotiated price markets," Queen's Economics Department Working Papers 274729, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274729
    DOI: 10.22004/ag.econ.274729
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    Keywords

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    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce

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