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Search cost and price dispersion in vertically related markets: the case of bank loans and deposits

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Author Info
Alfredo Martín-Oliver () (Banco de España)
Vicente Salas-Fumás () (Universidad de Zaragoza)
Jesús Saurina () (Banco de España)

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Abstract

Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer’s search costs in retail banking, consistent with predictions from the Carlson and McAfee (1983) model of market competition with search costs.

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File URL: http://www.bde.es/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/08/Fic/dt0825e.pdf
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Publisher Info
Paper provided by Banco de España in its series Banco de España Working Papers with number 0825.

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Length: 29 pages
Date of creation: Nov 2008
Date of revision:
Handle: RePEc:bde:wpaper:0825

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Related research
Keywords: Interest rate dispersion; market structure; search costs;

Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

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