Shopping for Mortgage Contracts: Price Discrimination, Bank Mergers, and Negotiation

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This award funds work that develops a new data analysis technique for an important class of markets. The new technique will be used to analyze very detailed data about consumer mortgages.In many markets prices are determined through a negotiation process between buyers and sellers. Sellers post or announce a price, but consumers may be able to negotiate a discount. The extent to which sellers negotiate may depend on customer characteristics. Despite the prevalence of discounting, existing empirical techniques for analyzing market data ignore discounting in differentiated products markets. This research project develops and applies a new empirical technique that allows for discounting.The technique is used to analyze very detailed data on a large set of approved mortgages issued in Canada between 1992 and 2004. These data provide extremely valuable information on features of the mortgage as well as household and market characteristics. Mortgages are a good case study for the new method because many consumers negotiate a discount from the price/interest rate 'posted' by a neighborhood financial institution.The project gives new insight into how the interplay of market concentration, differentiation, and information frictions determine the market power of banks. The first goal is a descriptive analysis of discounting and price discrimination in this market. The second goal is to understand how mergers in the Canadian banking industry affected mortgage interest rates. The third goal is to develop and estimate a full supply and demand model for this industry and use it to answer several different questions about the likely effect of credit regulations on demand for mortgages and housing.Understanding how consumers shop and negotiate for mortgages will give us new insight into how this market functions to support housing markets.