Are Prices 'Sticky' Online? Market Structure Effects and Asymmetric Responses to Cost Shocks in Online Mortgage Markets

43 Pages Posted: 2 Aug 2004

See all articles by Maria Arbatskaya

Maria Arbatskaya

Michael R. Baye

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy

Date Written: February 2, 2004

Abstract

We analyze daily mortgage rates posted by online lenders at the price comparison site, Microsurf. While cost shocks occurred almost daily in our sample, quoted mortgage rates are surprisingly rigid: Only 16 percent of the posted rates represent changes. However, firms that adjusted rates in response to cost shocks did so quite rapidly; about 98 percent of a cost shock was passed through within two days of the cost shock. Duration analysis reveals that the observed rigidity in rates systematically depends on market structure: Online mortgage rates are 30 to 40 percent more durable in concentrated markets than in markets where there are many competitors. We also find that rates posted online tend to exhibit downward stickiness; rate adjustments in response to cost increases are about twice the corresponding adjustments for cost decreases.

Keywords: Mortgage rate, price adjustment, price rigidity, price dispersion

JEL Classification: D43, L13, M3

Suggested Citation

Arbatskaya, Maria and Baye, Michael Roy, Are Prices 'Sticky' Online? Market Structure Effects and Asymmetric Responses to Cost Shocks in Online Mortgage Markets (February 2, 2004). Available at SSRN: https://ssrn.com/abstract=571103 or http://dx.doi.org/10.2139/ssrn.571103

Michael Roy Baye (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Bloomington, IN 47405
United States
812-855-2779 (Phone)
812-855-3354 (Fax)

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