Consumer switching costs and firm pricing: evidence from bank pricing of deposit accounts
AbstractThis paper employs extensive information on bank deposit rates and county migration patterns to test for pricing relationships implied by the existence of switching costs. While these relationships are derived formally, the intuition for them can be readily stated. Because some areas experience more in-migration than others, banks, in addressing the trade-off between attracting new customers and exploiting old ones, offer higher deposit rates in areas (and at times) experiencing more in-migration. Further, because out-migration implies that on average a locked-in customer will not be with the bank as many periods, greater out-migration should change the bank’s assessment of this trade-off such that the bank will offer lower deposit rates in areas (and during periods) exhibiting greater out-migration, all else equal. Also, because this effect of out-migration logically depends on the existence and extent of in-migration, an interaction effect is implied. Evidence strongly supporting these implied relationships is reported. Other tests of the implications of switching costs in the banking industry are also conducted.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-32.
Date of creation: 2008
Date of revision:
Other versions of this item:
- Timothy H. Hannan & Robert M. Adams, 2011. "Consumer Switching Costs And Firm Pricing: Evidence From Bank Pricing Of Deposit Accounts," Journal of Industrial Economics, Wiley Blackwell, vol. 59(2), pages 296-320, 06.
- NEP-ALL-2008-08-06 (All new papers)
- NEP-BAN-2008-08-06 (Banking)
- NEP-MIG-2008-08-06 (Economics of Human Migration)
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