Market Structure and the Diffusion of E-Commerce: Evidence from the Retail Banking Industry
AbstractThis paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking (and electronic commerce more generally) reduces the cost of performing many types of transactions for firms. The full benefits for firms from adoption, however, only accrue once consumers begin to perform a significant share of their transactions online. Since there are learning costs to adopting the new technology firms may try to encourage consumers to go online by affecting the relative quality of the online and offline options. Their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas, this is less of a concern for a more dominant firm. We develop a model of branch-service quality choice with switching costs meant to characterize the trade-off banks face when rationalizing their network between technology penetration and business stealing. The model is solved numerically and we show that the incentive to lower branch-service quality and drive consumers into electronic banking is greater in more concentrated markets and for more dominant banks. We find support for the predictions of the model using a panel of household survey data on electronic payment usage as well as branch location data, which we use to construct measures of branch quality.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 08-32.
Length: 47 pages
Date of creation: 2008
Date of revision:
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Financial institutions; Market structure and pricing;
Find related papers by JEL classification:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- D4 - Microeconomics - - Market Structure and Pricing
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-10-07 (All new papers)
- NEP-BAN-2008-10-07 (Banking)
- NEP-COM-2008-10-07 (Industrial Competition)
- NEP-ICT-2008-10-07 (Information & Communication Technologies)
- NEP-MIC-2008-10-07 (Microeconomics)
- NEP-MKT-2008-10-07 (Marketing)
- NEP-NET-2008-10-07 (Network Economics)
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.:
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