Dynamic Competition in Negotiated Price Markets

Using contract-level data for the Canadian mortgage market, this paper provides evidence of an “invest-and-harvest” pricing pattern. We build a dynamic model of price negotiation with search and switching frictions to capture key market features. We estimate the model and use it to investigate the effects of market frictions and the resulting dynamic competition on borrowers' and banks' payoffs. We show that dynamic pricing and the presence of search and switching costs have important implications for public policies.