Price Competition and Concentration in Search and Negotiation Markets: Evidence from Mortgage Lending
Jason Allen (),
Robert Clark () and
Staff Working Papers from Bank of Canada
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.
Keywords: Financial institutions; Financial services; Interest rates (search for similar items in EconPapers)
JEL-codes: G2 L1 (search for similar items in EconPapers)
Pages: 35 pages
New Economics Papers: this item is included in nep-com and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:12-4
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