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Search Frictions And Market Power In Negotiated Price Markets

Author

Listed:
  • Jason Allen

    () (Bank of Canada)

  • Robert Clark

    () (Queen's University)

  • Jean-Francois Houde

    () (Cornell University and NBER)

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 ineifficient 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

  • Jason Allen & Robert Clark & Jean-Francois Houde, 2018. "Search Frictions And Market Power In Negotiated Price Markets," Working Paper 1403, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1403
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    Cited by:

    1. Gautam Gowrisankaran & Aviv Nevo & Robert Town, 2015. "Mergers When Prices Are Negotiated: Evidence from the Hospital Industry," American Economic Review, American Economic Association, vol. 105(1), pages 172-203, January.
    2. Manolis Galenianos & Alessandro Gavazza, 2017. "A Structural Model of the Retail Market for Illicit Drugs," American Economic Review, American Economic Association, vol. 107(3), pages 858-896, March.
    3. Matthew Backus & Thomas Blake & Bradley Larsen & Steven Tadelis, 2018. "Sequential Bargaining in the Field: Evidence from Millions of Online Bargaining Interactions," NBER Working Papers 24306, National Bureau of Economic Research, Inc.
    4. Chen, Yuquan & Yu, Xiaohua, 2018. "Does the centralized slaughtering policy create market power for pork industry in China?," China Economic Review, Elsevier, vol. 50(C), pages 59-71.
    5. Galenianos, Manolis & Gavazza, Alessandro, 2019. "Regulatory Interventions in Consumer Financial Markets: The Case of Credit Cards," CEPR Discussion Papers 13807, C.E.P.R. Discussion Papers.
    6. Xavier D’Haultfœuille & Isis Durrmeyer & Philippe Février, 2019. "Automobile Prices in Market Equilibrium with Unobserved Price Discrimination," Review of Economic Studies, Oxford University Press, vol. 86(5), pages 1973-1998.
    7. Aguirregabiria, Victor & Clark, Robert & Wang, Hui, 2019. "The Geographic Flow of Bank Funding and Access to Credit: Branch Networks, Local Synergies, and Competition," CEPR Discussion Papers 13741, C.E.P.R. Discussion Papers.
    8. Greg Buchak & Gregor Matvos & Tomasz Piskorski & Amit Seru, 2018. "Beyond the Balance Sheet Model of Banking: Implications for Bank Regulation and Monetary Policy," NBER Working Papers 25149, National Bureau of Economic Research, Inc.
    9. Robert McKeown, 2017. "Where Are The Economies Of Scale In Canadian Banking?," Working Paper 1380, Economics Department, Queen's University.
    10. Mosk, Thomas, 2018. "Bargaining with a bank," SAFE Working Paper Series 211, Leibniz Institute for Financial Research SAFE.
    11. Jason Allen & Robert Clark & Jean-Fran?ois Houde, 2014. "The Effect of Mergers in Search Markets: Evidence from the Canadian Mortgage Industry," American Economic Review, American Economic Association, vol. 104(10), pages 3365-3396, October.
    12. Leonardo Gambacorta & Luigi Guiso & Paolo Mistrulli & Andrea Pozzi & Anton Tsoy, 2017. "The Cost of Distorted Financial Advice - Evidence from the Mortgage Market," EIEF Working Papers Series 1713, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2017.
    13. Manolis Galenianos & Alessandro Gavazza, 2014. "A quantitative analysis of the retail market for illicit drugs," 2014 Meeting Papers 618, Society for Economic Dynamics.
    14. Robert Clark & Hui Wang & Victor Aguirregabiria, 2017. "The Geographic Flow Of Bank Funding And Access To Credit: Branch Networks And Local-market Competition," Working Paper 1402, Economics Department, Queen's University.

    More about this item

    Keywords

    Martgage markets; Search costs; Brand loyalty; Bargaining;

    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
    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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