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Product differentiation and efficiencies in the retail banking industry

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  • Dai, Mian
  • Yuan, Yuan

Abstract

We empirically quantify the welfare implications of bank entry in the United States between 2000 and 2008. We use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes. We find no evidence for under- or over-entry. Compared with the socially efficient outcome, there is a mild welfare loss resulting from banks entering wrong locations in product space. Compared with the observed outcome, consumer surplus drops by 20–38% and bank profits decline by 48–59% when banks are homogeneous. Therefore product differentiation significantly improves welfare under free entry.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:4907-4919
    DOI: 10.1016/j.jbankfin.2013.09.005
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    Cited by:

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    3. Abhilash Nair & Vinod R, 2015. "Determinants of allocative, scale and scope efficiencies of Indian banks," Working papers 177, Indian Institute of Management Kozhikode.
    4. Laura Marcela Capera Romero, 2021. "The Effects of Usury Ceilings on Consumers Welfare: Evidence from the Microcredit Market in Colombia," Tinbergen Institute Discussion Papers 21-055/IV, Tinbergen Institute.
    5. In Kyung Kim & Yoon-Jin Lee & Young-Ro Yoon, 2017. "Sequential Supply Decision and Market Efficiency: Theory and Evidence," Working Papers 1703, Nazarbayev University, Department of Economics, revised Mar 2017.

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    More about this item

    Keywords

    Banking; Welfare; Demand; Entry; Competition; Product differentiation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other

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