An empirical study of the price adjustment process in the residential mortgage market

Abstract

This work is a contribution to the empirical literature on the pattern of price adjustment in a competitive non-tatonnoment environment. The model of this environment allows for an analysis of the price strategy of firms which are attempting to maximize the expected present value of profits. It is shown that under certain general assumptions, profit maximizing pricing strategy leads each firm to adjust its price toward the market's mean price. For an empirical test of this implication, the price adjustments of 20 mortgage firms over a 30-week period are analyzed. Results of this analysis show that (for a majority of the firms); (1) prices are adjusted in response to a deviation from average market price; and (2) prices are adjusted to a degree not significantly different from the average market adjustment. Additional empirical work includes a description of price changes as a measure of product homogeneity and an analysis of the effect of random shocks on the variance of product prices.