MARKET STRUCTURE AND MORTGAGE PRICING: THE ROLE OF INFORMATION IN FIRM AND CONSUMER BEHAVIOR

This dissertation analyzes information, market structure, and firm pricing strate-gies. I begin the dissertation with an analysis of the market structure of the mortgage in-dustry. I find that the configuration of the mortgage market at its present state is vastly different than its historical structure. The reduction in the cost of transmitting informa-tion has increased the collaborative environment and facilitated the dis-integration of the supply chain. Generally, the mortgage industry has been successful at reducing principal-agent problems and minimizing asymmetric information concerns that arise in segmented markets. In the first essay I provide a theoretical explanation of the effect of the internet on market outcomes. Search models assume that the reduction in search frictions would lead to competitive markets. However, I argue that gatekeepers operating in online markets may create an anticompetitive effect, in addition to reducing the consumers’ search cost. Therefore, the conduct of the gatekeeper can cause prices in online markets to be higher than in retail markets and provide online firms with larger profits. In the second essay “I empirically examine the role of the internet and Internet Comparison Search sites in reducing consumer search costs and their effects on the prices consumers pay for mortgages. Additionally, I expand the study to test for the effects of the internet on firm profits. Using a unique data set, I examine a mortgage firm’s pricing strategies and profits in online and retail markets, and find evidence of market power in online markets that do not exist in retail markets. The presumed benefits to the consumer from the reduction of search cost are offset by the anticompetitive environment in online markets. In the final essay, I examine a mortgage firm’s portfolio choice. I investigate the loan characteristics that affect the firm’s decision to retain mortgages as part of its own portfolio. I find that the decision to retain loans as a lender is driven by unobservable qualities. The firm does sort loans by quality, but it also prices non-brokered loans lower based on unobservable qualities. The sorting behavior suggests that asymmetric information exists between the lender and the secondary market