Search Frictions and Market Power in Negotiated Price Markets

Jason Allen, Robert Clark, Jean-François Houde

NBER Working Paper No. 19883
Issued in February 2014, Revised in April 2014
NBER Program(s):Industrial Organization

This paper develops and estimates a search and bargaining model designed to measure the welfare loss associated with frictions in oligopoly markets with negotiated prices. We use the model to quantify the consumer surplus loss induced by the presence of search frictions in the Canadian mortgage market, and evaluate the relative importance of market power, inefficient allocation, and direct search costs in explaining the loss. Our results suggest that search frictions reduce consumer surplus by almost $20 per month per consumer, and that 17% of this reduction can be associated with discrimination, 30% with inefficient matching, and the remainder with the search cost.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w19883

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