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Entry into banking markets and the first-mover advantage

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Author Info
Allen N. Berger
Astrid A. Dick

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Abstract

Using a sample for 1972-2002 with over 8,000 bank entries into local markets, we find a market share advantage for earlier entrants. In particular, the earlier a bank enters, the larger is its market share relative to other banks, controlling for firm, market and time effects, with a market share advantage for early movers between 8 and 12 percentage points, depending on the order of entry. This magnitude also varies according to the entry method used, being attenuated for banks that enter through mergers, as opposed to opening a branch or through a de novo charter. Branded entrants suffer a lower disadvantage relative to unbranded entrants. The market share advantage is diminished in markets with high population growth, presumably as new consumers in the market have yet to be locked in with a bank and face no switching costs. The results are stable over the period.

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Publisher Info
Article provided by Federal Reserve Bank of Chicago in its journal Proceedings.

Volume (Year): (2004)
Issue (Month): May ()
Pages: 243-254
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Handle: RePEc:fip:fedhpr:y:2004:i:may:p:243-254

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Keywords: Banking market;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Astrid A. Dick, 2003. "Market structure and quality: an application to the banking industry," Finance and Economics Discussion Series 2003-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Allen N. Berger & Loretta J. Mester, 1997. "Inside the Black Box: What Explains Differences in the Efficiencies of Financial Institutions?," Center for Financial Institutions Working Papers 97-04, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
    Other versions:
  3. Astrid A. Dick, 2002. "Demand estimation and consumer welfare in the banking industry," Finance and Economics Discussion Series 2002-58, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Blackwell Publishing, vol. 62(4), pages 515-39, October. [Downloadable!] (restricted)
  5. Conrad, Cecilia A., 1983. "The advantage of being first and competition between firms," International Journal of Industrial Organization, Elsevier, vol. 1(4), pages 353-364, December. [Downloadable!] (restricted)
  6. Gandal, Neil, 2001. "The dynamics of competition in the internet search engine market," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1103-1117, July. [Downloadable!] (restricted)
  7. Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," NBER Working Papers 8752, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  8. Paul S. Calem & Loretta J. Mester, 1995. "Consumer behavior and the stickiness of credit card interest rates," Working Papers 95-10, Federal Reserve Bank of Philadelphia.
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  9. Tufano, Peter, 1989. "Financial innovation and first-mover advantages," Journal of Financial Economics, Elsevier, vol. 25(2), pages 213-240, December. [Downloadable!] (restricted)
  10. Avinash Dixit, 1979. "A Model of Duopoly Suggesting a Theory of Entry Barriers," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 20-32, Spring. [Downloadable!] (restricted)
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  11. Rebel A. Cole & Lawrence G. Goldberg & Lawrence J. White, 1997. "Cookie-Cutter versus Character: The Micro Structure of Small Business Lending by Large and Small Banks," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-022, New York University, Leonard N. Stern School of Business-.
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  12. A. Michael Spence, 1977. "Entry, Capacity, Investment and Oligopolistic Pricing," Bell Journal of Economics, The RAND Corporation, vol. 8(2), pages 534-544, Autumn. [Downloadable!] (restricted)
  13. Neil Gandal, 2001. "The Dynamics of Competition in the Internet Search Engine Market," Microeconomics 0012003, EconWPA. [Downloadable!]
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  15. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn. [Downloadable!] (restricted)
  16. Elizabeth Kiser, 2002. "Predicting Household Switching Behavior and Switching Costs at Depository Institutions," Review of Industrial Organization, Springer, vol. 20(4), pages 349-365, June. [Downloadable!] (restricted)
  17. Neil Gandal, 2001. "The Dynamics of Competition in the Internet Search Engine Market," Department of Economics, Working Paper Series 1017, Department of Economics, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
  18. Astrid A. Dick, 2003. "Market structure and quality : an application to the banking industry," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 137-150.
  19. Schmalensee, Richard, 1982. "Product Differentiation Advantages of Pioneering Brands," American Economic Review, American Economic Association, vol. 72(3), pages 349-65, June. [Downloadable!] (restricted)
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  20. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May. [Downloadable!] (restricted)
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  21. Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 15(3), pages 901-926.
  22. Joseph P. Hughes & William W. Lang & Loretta J. Mester & Choon-Geol Moon, 1997. "Recovering risky technologies using the almost ideal demand system: an application to U.S. banking," Working Papers 97-8, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  23. Stango, Victor, 2002. "Pricing with Consumer Switching Costs: Evidence from the Credit Card Market," Journal of Industrial Economics, Blackwell Publishing, vol. 50(4), pages 475-92, December. [Downloadable!] (restricted)
  24. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, vol. 60(5), pages 1127-50, September. [Downloadable!] (restricted)
  25. Fudenberg, Drew & Tirole, Jean, 1984. "The Fat-Cat Effect, the Puppy-Dog Ploy, and the Lean and Hungry Look," American Economic Review, American Economic Association, vol. 74(2), pages 361-66, May. [Downloadable!] (restricted)
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This page was last updated on 2009-10-20.

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