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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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    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.
    2. Ongena, Steven & Paraschiv, Florentina & Reite, Endre J., 2023. "Counteroffers and Price Discrimination in Mortgage Lending," Journal of Empirical Finance, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Financial institutions; Financial services; Interest rates;
    All these keywords.

    JEL classification:

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

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