SMU SOE Seminar (Nov 29, 2019): Price discrimination, switching costs and welfare: Evidence from the Dutch mortgage market

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TOPIC:

PRICE DISCRIMINATION, SWITCHING COSTS AND WELFARE: EVIDENCE FROM THE DUTCH MORTGAGE MARKET

ABSTRACT In many markets with switching costs firms charge a lower price to new customers than to existing customers, a practice called history-based price discrimination. By exploiting a ban on history-based price discrimination in the Dutch mortgage market, this paper estimates the effects of history-based price discrimination on consumer surplus, profits and welfare. These effects are theoretically ambiguous because history-based price discrimination can make markets more or less competitive. I estimate a structural model, of which the supply side consists of a dynamic game. To deal with the curse of dimensionality, I employ techniques from machine learning to reduce the dimension of this game’s state space. I implement these techniques in a new estimation method for dynamic games, which I justify with a new solution concept: Sparse Markov Perfect Equilibrium (SMPE). In an SMPE, firms optimally pay attention to a subset of state variables instead of the full state. Therefore, the state space is considerably smaller than under the standard assumption of Markov Perfect Equilibrium. I show that the Lasso identifies which variables firms pay attention to. For an average mortgage, banning history-based price discrimination increases welfare by €125 per year and consumer surplus by €415 per year, while bank profits drop by €290 per year. Click here to view the paper. Click here to view the CV.
		PRESENTER Jurre Thiel Copenhagen Business School
		RESEARCH FIELDS Industrial Organization Applied Microeconomics
		DATE: 29 November 2019 (Friday)
		TIME: 4pm - 5.30pm
		VENUE: Meeting Room 5.1, Level 5 School of Economics Singapore Management University 90 Stamford Road Singapore 178903

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