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

Author

Listed:
  • Alfredo Martín-Oliver

    () (Banco de España)

  • Vicente Salas-Fumás

    () (Universidad de Zaragoza)

  • Jesús Saurina

    () (Banco de España)

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.

Suggested Citation

  • Alfredo Martín-Oliver & Vicente Salas-Fumás & Jesús Saurina, 2008. "Search cost and price dispersion in vertically related markets: the case of bank loans and deposits," Working Papers 0825, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0825
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    References listed on IDEAS

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    Cited by:

    1. John K. Ashton & Andros Gregoriou, 2014. "The Influence of Banking Centralization on Depositors: Regional Heterogeneities in the Transmission of Monetary Policy," Regional Studies, Taylor & Francis Journals, vol. 48(9), pages 1467-1482, September.
    2. Anderson, Robert D.J. & Ashton, John K. & Hudson, Robert S., 2014. "The influence of product age on pricing decisions: An examination of bank deposit interest rate setting," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 216-230.
    3. Fabien Tripier, 2014. "A Search-Theoretic Approach to Efficient Financial Intermediation," Working Papers 2014-18, CEPII research center.
    4. J.A. Bikker & D.F. Gerritsen & Steffie M. Schwillens, 2016. "Competing for savings : how important is creditworthiness during the crisis?," Working Papers 16-01, Utrecht School of Economics.

    More about this item

    Keywords

    Interest rate dispersion; market structure; search costs;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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