State-aided price coordination in the dutch mortgage market

This paper shows how price leadership bans imposed, as part of the European Commission's State aid control, on all main mortgage providers but the largest bank shifted the Dutch mortgage market from a competitive to a collusive price leadership equilibrium. In May 2009, mortgage rates in The Netherlands suddenly rose against the decreasing funding cost trend to almost a full percentage point above the Eurozone average. We derive equilibrium best-response functions, identify the price leader, and estimate response adjustments in cointegrating equations on a large data set of daily mortgage rates 2004-2012. Consistent with the full coordination equilibrium, we Önd structural decreases in the leader's cost pass-through and H-statistic, suggesting monopoly power, as well as much closer following of the leader's price and strongly reduced trans- mission of common cost changes into price followers' mortgage rates. All the structural breaks are around the Spring of 2009, when the price leadership bans were negotiated. Predicted overcharges are 125 basis points or 26% on average.