Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Wednesday, February 6, 2019

Search frictions and market power in negotiated price markets

Allen, Jason; Clark, Robert; Houde, Jean-Francois explore Search frictions and market power in negotiated price markets.

Abstract: We provide a framework for empirical analysis of negotiated-price markets. Using mortgage market data and a search and negotiation model, we characterize the welfare impact of search frictions and quantify the role of search costs and brand loyalty for market power. Search frictions reduce consumer surplus by $12/month/consumer, 28% of which can be associated with discrimination, 22% with inefficient matching, and 50% with search costs. Large consumer-base banks have margins 70% higher than those with small consumer bases. The main source of this incumbency advantage is brand loyalty; however, price discrimination based on search frictions accounts for almost a third.

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