QUOTE (MikeMilovick @ Dec 2 2010, 02:42 PM) Michael; Thanking for your comments. I worked at a Bank. Here`s the deal: Think of the five year bond rate as money at wholesale. The banks are not price-takers. The banks adjust their prices based on the bond rate - almost always in synch with each other. i.e. five year bond rate goes 0.2% to 2.4%,. all of a sudden, residential five year rate goes from 4.8% to 5.0% - maintaining their spread between wholesale and retail.
Michael: This is not price taking. Maintaining a consistent spread between wholesale and retail by the banks is called price fixing. If the banks were competitive, you would see variances between the major banks. If you think about this, you might start to see what is actually occuring at the bank level here from an anti-competitive perspective.
Do you agree that money is fungible? (IE one dollar is the same as any other dollar, the same as one mcf of gas is the same as any other mcf of gas)
If money is fungible, that makes it a commodity. "A basic good used in commerce that is interchangeable with other commodities of the same type... "
http://www.investopedia.com/terms/c/commodity.asp
All commodity goods are produced by price-takers in any situation where a given economic actors actions do not have a significant affect on the price of the good. If the Royal (largest bank) were to stop making residential loans tomorrow, it seems likely to me that price of residential mortgages would not greatly change, as many other businesses have the capacity to convert bond money (wholesale) to mortgage money (retail). There would be an adjustment period, but the money that used to flow from bonds to mortgages through the Royal would find a different conduit.
The services provided by a mortgage broker are a great example of this. For the average homebuyer, their broker should steer them to whomever provides the lowest rate/best terms. In this case the only product differentiation is through the price of the product, which is indicative of price-taker environment.
You mentioned that the banks move their prices together, but that is actually indicative that they are price takers. In a commodity business such as money, (or gasoline) different suppliers have the same price because if they didn`t have the lowest price in the market, they would lose the majority of their business. So the price of the commodity settles out at the lowest economic price, and all of the competitors in the market have to match. Another great example of this is airline seats, where different airlines most often have the same price, as they have difficulty differentiating their products.
A great counter example of non-commodity products is computers. An Apple iMac sells for more than a comparable PC because Apple has differentiated their product with design, advertising, etc. Thus, different companies have different prices, and it is not a commodity.
Regards,
Michael
