Search Frictions and Market Power in Negotiated Price Markets

50 Pages Posted: 11 Aug 2012 Last revised: 31 Jan 2014

See all articles by Jason Allen

Jason Allen

Government of Canada - Bank of Canada

C. Robert Clark

HEC Montreal

Jean-Francois Houde

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2014

Abstract

This paper develops and estimates a search and bargaining model designed to measure the welfare loss associated with frictions in oligopoly markets with negotiated prices. We use the model to quantify the consumer surplus loss induced by the presence of search frictions in the Canadian mortgage market, and evaluate the relative importance of market power, inefficient allocation, and direct search costs in explaining the loss. Our results suggest that search frictions reduce consumer surplus by almost $20 per month on a $100,000 loan, and that 17% of this reduction can be associated with discrimination, 30% with inefficient matching, and the remainder with the search cost. In addition, we find that product differentiation attenuates the effect of search frictions by reducing the cost of gathering quotes and improving efficiency, while posted prices do so through the ability of the first-mover to price discriminate. In contrast, competition amplifies the welfare effect of search frictions. Despite this, the overall effect of competition is to increase aggregate consumer surplus and drive prices down, but these effects are not spread equally across consumers: those with low search costs benefit more from competition.

Keywords: Financial institutions, financial services, market structure and pricing

JEL Classification: G21, L22, D4

Suggested Citation

Allen, Jason J. and Clark, C. Robert and Houde, Jean-Francois, Search Frictions and Market Power in Negotiated Price Markets (January 29, 2014). Available at SSRN: https://ssrn.com/abstract=2126625 or http://dx.doi.org/10.2139/ssrn.2126625

Jason J. Allen (Contact Author)

Government of Canada - Bank of Canada ( email )

Ottawa, Ontario K1A 0G9
Canada

C. Robert Clark

HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Jean-Francois Houde

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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