Search Frictions and Market Power in Negotiated-Price Markets

Jason Allen, Robert Clark and Jean-François Houde

Journal of Political Economy, 2019, vol. 127, issue 4, 1550 - 1598

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 percent of which can be associated with discrimination, 22 percent with inefficient matching, and 50 percent with search costs. Banks with large consumer bases have margins 70 percent 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.

Date: 2019
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Related works:
Working Paper: Search Frictions And Market Power In Negotiated Price Markets (2018)
Working Paper: Search Frictions and Market Power in Negotiated Price Markets (2014)
Working Paper: Price Negotiation in Differentiated Products Markets: Evidence from the Canadian Mortgage Market (2012)
Working Paper: Price negotiation in differentiated product markets: An analysis of the market for insured mortgages in Canada (2010)
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