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.

To Bargain or Not to Bargain: The Role of Fixed Costs in Price Negotiations

“…In contrast, we jointly model the bargaining and purchase decisions to show how individual-level data can be used to nonparametrically identify and estimate the (heterogeneous) distribution of bargaining parameters. Finally, this article is also related to Allen, Clark, and Houde (2018), who study the role of search costs (similar to bargaining cost in our setting) and consumers’ bargaining ability in determining the number of mortgage companies a consumer negotiates with and receives quotes from.…”

Who Loses when Prices are Negotiated? An Analysis of the New Car Market

“…As a result, new homebuyers often solicit multiple offers and bargain extensively with banks. For our purposes we summarize the measures of price dispersion in this industry reported in Allen et al [2014]. For retail gasoline, we summarize measures of price dispersion using the data in Chandra and Tappata [2011], which we obtained for this purpose.…”

“…Both measures are unit-less and therefore directly comparable across the three studies. In addition, the Allen et al [2014] study used a similar method to ours of constructing the residuals of firm margins by controlling for a rich set of covariates; we therefore present price dispersion measures for this distribution of residuals as well.…”

“…Our estimating strategy minimizes the potential impact of other factors: whether the vehicle was leased or financed; whether it was purchased at the end of the month or year, when dealers face incentives to increase sales; whether certain dealers were more likely to offer discounts in a manner correlated with customer demographics; whether the vehicle was in greater demand-measured by the average time the particular model 1 A large theoretical literature acknowledges the importance of such transaction costs and seeks to understand why purchases such as housing and automobiles involve negotiated prices; see Bester [1993] and Wang [1995]. Recent empirical research shows that the transaction costs of negotiations in other markets can be significant; Allen et al [2014] study mortgage negotiations and Jindal and Newberry [2015] examine home appliances. 2 Surveys routinely show that the majority of car buyers dislike the negotiating process; a 2011 Kelly Blue Book survey showed that 59% of consumers hate haggling, and a 2008 survey in Marketing Magazine estimates this fraction at over 80%.…”

Do Lenders Still Discriminate? A Robust Approach for Assessing Differences in Menus

“…6 Negotiation in mortgage markets is common. Studies that look at the search and negotiation process in mortgage markets include Allen, Clark, and Houde (2014), Houde (2019), andBhutta, Fuster, andHizmo (2019). A reason why minority borrowers may behave as if they have higher search costs is in Agarwal, Grigsby, Hortaçsu, Matvos, Seru, and Yao (2020), where borrowers internalize a higher probability of rejection.…”