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Location and competition in retail banking

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  • Ho, Katherine
  • Ishii, Joy
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Abstract

We investigate the impact of banking deregulation during the 1990s on consumer welfare. We estimate a spatial model of consumer demand for retail bank deposits that explicitly accounts for consumer disutility from distance traveled. This is important given the substantial changes in banks' branch networks observed in the data. Our model indicates that cross-price elasticities between banks whose branches are close to consumers ('close' banks) are larger than those between 'far' banks and more than double the cross-price elasticity of 'close' banks with respect to 'far' banks. We distinguish between thrifts and other banks and find that within-thrift competitive effects are stronger than within-bank effects or those between thrifts and banks. We use our estimates to predict the effect of changes in market structure on consumer welfare following the branching deregulation of the Riegle-Neal Act of 1994. Our results indicate that the median household gained around $60 per year from the changes. Approximately two thirds of the gains come from within-market changes in market structure. The gains were greater in markets with high initial numbers of banks than elsewhere.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 29 (2011)
Issue (Month): 5 (September)
Pages: 537-546

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Handle: RePEc:eee:indorg:v:29:y:2011:i:5:p:537-546

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Web page: http://www.elsevier.com/locate/inca/505551

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Keywords: Spatial competition Bank branching Banking Deregulation;

References

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  1. Allen N. Berger & Anthony Saunders & Joseph M. Scalise & Gregory F. Udell, 1997. "The effects of bank mergers and acquisitions on small business lending," Finance and Economics Discussion Series 1997-28, Board of Governors of the Federal Reserve System (U.S.).
  2. Andrew Cohen, 2004. "Market structure and market definition: the case of small market banks and thrifts," Finance and Economics Discussion Series 2004-02, Board of Governors of the Federal Reserve System (U.S.).
  3. Dick, Astrid A., 2008. "Demand estimation and consumer welfare in the banking industry," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1661-1676, August.
  4. Dean F. Amel & Martha Starr-McCluer, 2001. "Market definition in banking: recent evidence," Finance and Economics Discussion Series 2001-16, Board of Governors of the Federal Reserve System (U.S.).
  5. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-52, December.
  6. Astrid A. Dick, 2006. "Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance," The Journal of Business, University of Chicago Press, vol. 79(2), pages 567-592, March.
  7. Fabio Panetta & Dario Focarelli, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Italian Market for Bank Deposits," CEIS Research Paper 10, Tor Vergata University, CEIS.
  8. Dario Focarelli & Fabio Panetta, 2003. "Are Mergers Beneficial to Consumers? Evidence from the Market for Bank Deposits," American Economic Review, American Economic Association, vol. 93(4), pages 1152-1172, September.
  9. Peter Davis, 2006. "Spatial competition in retail markets: movie theaters," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 964-982, December.
  10. Robert M. Adams & Kenneth P. Brevoort & Elizabeth K. Kiser, 2007. "WHO COMPETES WITH WHOM? THE CASE OF DEPOSITORY INSTITUTIONS -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 55(1), pages 141-167, 03.
  11. Cohen, Andrew, 2004. "Market structure and market definition: the case of small market banks and thrifts," Economics Letters, Elsevier, vol. 85(1), pages 77-83, October.
  12. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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Citations

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Cited by:
  1. Wilko Bolt & David Humphrey, 2013. "Competition in bank-provided payment services," Working Papers 13-17, Federal Reserve Bank of Philadelphia.
  2. Carlos Pérez Montes, 2013. "The impact of interbank and public debt markets on the competition for bank deposits," Banco de Espa�a Working Papers 1319, Banco de Espa�a.
  3. Pérez Montes, Carlos, 2014. "The effect on competition of banking sector consolidation following the financial crisis of 2008," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 124-136.
  4. Ho, Chun-Yu, 2014. "Switching cost and deposit demand in China," BOFIT Discussion Papers 9/2014, Bank of Finland, Institute for Economies in Transition.
  5. Dai, Mian & Yuan, Yuan, 2013. "Product differentiation and efficiencies in the retail banking industry," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4907-4919.
  6. Huysentruyt, Marieke & Lefevere, Eva & Menon, Carlo, 2013. "Dynamics of retail-bank branching in Antwerp (Belgium) 1991–2006: Evidence from micro-geographic data," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 291-304.

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