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Price Competition and Concentration in Search and Negotiation Markets: Evidence from Mortgage Lending

Author

Listed:
  • Jason Allen
  • Robert Clark
  • Jean-François Houde

Abstract

This paper examines the impact of bank consolidation on mortgage rates in order to evaluate the extent to which mortgage markets are competitive. Mortgage markets are decentralized and so rates are determined through a search and negotiation process. The primary effect of a merger therefore is to reduce the number of partners available with whom to negotiate, although it can also change the characteristics of the product, and impact the search effort of consumers. Using a Canadian merger as a case study, we find that, overall, consolidation had little effect on rates suggesting that, on average, the mortgage market is fairly competitive. However, a decomposition of the aggregate treatment effect reveals important heterogeneity in the impact of the merger. We find that consumers gathering multiple quotes are affected by the merger, while those who do not search are not. These results suggest that market power originates in large part from the presence of asymmetric search costs.

Suggested Citation

  • Jason Allen & Robert Clark & Jean-François Houde, 2012. "Price Competition and Concentration in Search and Negotiation Markets: Evidence from Mortgage Lending," Staff Working Papers 12-4, Bank of Canada.
  • Handle: RePEc:bca:bocawp:12-4
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    References listed on IDEAS

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    1. Justine S. Hastings, 2004. "Vertical Relationships and Competition in Retail Gasoline Markets: Empirical Evidence from Contract Changes in Southern California," American Economic Review, American Economic Association, vol. 94(1), pages 317-328, March.
    2. Orley Ashenfelter & Daniel Hosken & Matthew Weinberg, 2009. "Generating Evidence to Guide Merger Enforcement," CPI Journal, Competition Policy International, vol. 5.
    3. Ali Hortaçsu & Chad Syverson, 2007. "Cementing Relationships: Vertical Integration, Foreclosure, Productivity, and Prices," Journal of Political Economy, University of Chicago Press, vol. 115, pages 250-301.
    4. Breslaw, Jon & Irvine, Ian & Rahman, Abdul, 1996. "Instrument Choice: The Demand for Mortgages in Canada," Journal of Urban Economics, Elsevier, vol. 39(3), pages 282-302, May.
    5. Bester, Helmut, 1993. "Bargaining versus Price Competition in Markets with Quality Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 278-288, March.
    6. Susan E. Woodward & Robert E. Hall, 2012. "Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence," American Economic Review, American Economic Association, vol. 102(7), pages 3249-3276, December.
    7. William Adams & Liran Einav & Jonathan Levin, 2009. "Liquidity Constraints and Imperfect Information in Subprime Lending," American Economic Review, American Economic Association, vol. 99(1), pages 49-84, March.
    8. Jason Allen & Robert Clark & Jean-François Houde, 2008. "Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry," Staff Working Papers 08-32, Bank of Canada.
    9. Ali Hortacsu & Chad Syverson, 2003. "Product Differentiation, Search Costs, and Competition in the Mutual Fund Industry: A Case Study of the S&P 500 Index Funds," NBER Working Papers 9728, National Bureau of Economic Research, Inc.
    10. Fabio Panetta & Fabiano Schivardi & Matthew Shum, 2009. "Do Mergers Improve Information? Evidence from the Loan Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 673-709, June.
    11. Preyas S. Desai & Devavrat Purohit, 2004. "“Let Me Talk to My Manager”: Haggling in a Competitive Environment," Marketing Science, INFORMS, vol. 23(2), pages 219-233, August.
    12. James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," Econometrica, Econometric Society, vol. 66(5), pages 1017-1098, September.
    13. Jason Allen & Robert Clark & Jean-François Houde, 2011. "Discounting in Mortgage Markets," Staff Working Papers 11-3, Bank of Canada.
    14. Kristopher S. Gerardi & Lorenz Goette & Stephan Meier, 2010. "Financial literacy and subprime mortgage delinquency: evidence from a survey matched to administrative data," FRB Atlanta Working Paper 2010-10, Federal Reserve Bank of Atlanta.
    15. Paola Sapienza, 2002. "The Effects of Banking Mergers on Loan Contracts," Journal of Finance, American Finance Association, vol. 57(1), pages 329-367, February.
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    Cited by:

    1. Jason Allen & H. Evren Damar & David Martinez-Miera, 2016. "Consumer Bankruptcy, Bank Mergers, and Information," Review of Finance, European Finance Association, vol. 20(4), pages 1289-1320.

    More about this item

    Keywords

    Financial institutions; Financial services; Interest rates;

    JEL classification:

    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • G2 - Financial Economics - - Financial Institutions and Services

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