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Market Structure and Competition among Retail Depository Institutions

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  • Andrew M. Cohen

    (Federal Reserve Board of Governors)

  • Michael J. Mazzeo

    (Kellogg School of Management, Northwestern University)

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    Abstract

    We assess competition among retail depository institutions in 1,884 rural markets. We estimate an equilibrium market structure model that endogenizes the operating decisions of three types of depository institutions: multimarket banks, single-market banks, and thrift institutions. Observed market structures and a game-theoretic specification of entry behavior identify the parameters of an underlying profit function. We find strong evidence that product differentiation generates additional profits for retail depository institutions. These profits help to maintain smaller banks and thrifts, even as larger banks expand their operations. Consumers have more options, as more institutions can profitably operate as a result of product differentiation. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by MIT Press in its journal The Review of Economics and Statistics.

    Volume (Year): 89 (2007)
    Issue (Month): 1 (February)
    Pages: 60-74

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    Handle: RePEc:tpr:restat:v:89:y:2007:i:1:p:60-74

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    1. Guest Post: A New Financial Foundation?
      by Leo Kolivakis in Naked capitalism on 2009-06-16 11:40:00
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    Cited by:
    1. Victor Aguirregabiria & Robert Clark & Hui Wang, 2012. "Diversification of Geographic Risk in Retail Bank Networks: Evidence from Bank Expansion after the Riegle-Neal Act," Working Papers, University of Toronto, Department of Economics tecipa-465, University of Toronto, Department of Economics.
    2. Kondo, Kazumine, 2014. "Do Credit Associations Compete with Each Other in Japanese Regional Lending Markets?," MPRA Paper 56669, University Library of Munich, Germany.
    3. Yu-ter Wang, 2008. "Product Differentiation: An Alternative To Cvds," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 76(3), pages 513-517, 09.
    4. Pérez Montes, Carlos, 2014. "The effect on competition of banking sector consolidation following the financial crisis of 2008," Journal of Banking & Finance, Elsevier, Elsevier, vol. 43(C), pages 124-136.
    5. Coublucq, Daniel, 2013. "Demand estimation with selection bias: A dynamic game approach with an application to the US railroad industry," DICE Discussion Papers, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE) 94, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    6. Xiao, Mo & Orazem, Peter, 2010. "Does the Fourth Entrant Make Any Difference? Entry and Competition in the Early U.S. Broadband Market," Staff General Research Papers, Iowa State University, Department of Economics 32147, Iowa State University, Department of Economics.
    7. Nathan H. Miller, 2008. "Competition When Consumers Value Firm Scope," EAG Discussions Papers, Department of Justice, Antitrust Division 200807, Department of Justice, Antitrust Division.
    8. Steven Deller & Reka Sundaram-Stukel, 2012. "Spatial patterns in the location decisions of US credit unions," The Annals of Regional Science, Springer, Springer, vol. 49(2), pages 417-445, October.
    9. Carlos Pérez Montes, 2013. "The impact of interbank and public debt markets on the competition for bank deposits," Banco de Espa�a Working Papers, Banco de Espa�a 1319, Banco de Espa�a.
    10. Dai, Mian & Yuan, Yuan, 2013. "Product differentiation and efficiencies in the retail banking industry," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(12), pages 4907-4919.
    11. Phil Molyneux & Hong Liu & John O.S. Wilson, 2010. "Competition and Stability in European Banking: A Regional Analysis," Working Papers, Bangor Business School, Prifysgol Bangor University (Cymru / Wales) 10019, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    12. Antonis Michis, 2013. "Measuring Market Power in the Banking Industry in the Presence of Opportunity Cost," Working Papers, Central Bank of Cyprus 2013-01, Central Bank of Cyprus.
    13. Benjamin Chabot & Charles C. Moul, 2013. "Bank panics, government guarantees, and the long-run size of the financial sector: evidence from free-banking America," Working Paper Series, Federal Reserve Bank of Chicago WP-2013-03, Federal Reserve Bank of Chicago.
    14. Andrew M. Cohen & Beth A. Freeborn & Brian McManus, 2007. "Competition and Crowding-Out among Public, Non-Profit and For-Profit Organizations: Evidence from Outpatient Substance Abuse Treatment," Working Papers, Department of Economics, College of William and Mary 52, Department of Economics, College of William and Mary.

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