Friday, August 16, 2013
Posted by D. Daniel Sokol
Jason Allen, Bank of Canada, Robert Clark, HEC Montreal and Jean-Francois Houde, Wharton and NBER discuss The Effect of Mergers in Search Market: Evidence from the Canadian Mortgage Industry.
ABSTRACT: We examine the relationship between concentration and price dispersion using variation induced by a merger in the Canadian mortgage market. Since interest rates are determined through a search and negotiation process, consolidation eliminates a potential negotiation partner, weakening consumers bargaining positions. We combine reduced-form techniques to estimate the mergers distributional impact, with a structural model to measure market power across consumers with different search costs. Our results show that competition benefits only consumers at the bottom and middle of the transaction price distribution. Estimates from a search and negotiation model attribute these differences to the presence of large search frictions.