Non-Salient Fees in the Mortgage Market
61 Pages Posted: 9 Sep 2019
Date Written: September 6, 2019
This paper studies supply-side product pricing when consumers underreact to non-salient fees. Using comprehensive data on issued and offered mortgages in the UK, I document that lenders differ substantially in the fees they charge, and that borrowers appear less overall cost-sensitive to products with fees. In order to distinguish from demand factors such as unobservable preferences or product characteristics, I show that lenders pass on firm-specific funding cost shocks via fees, but not interest rates, consistent with strategic pricing of fees, and maintaining competitive prices in the salient price dimension, interest rates. I further find heterogeneity in pricing across lenders: those who rely on high fees tend to have higher funding cost, lower return on equity and larger branch networks, in line with a specialization equilibrium in which high-cost lenders are able to match with less cost-sensitive consumers.
Keywords: price dispersion, salience, strategic pricing, mortgages
JEL Classification: G21, G41, D12, D14, D18
Suggested Citation: Suggested Citation