IDEAS home Printed from https://ideas.repec.org/p/fip/fedgfe/2004-46.html
   My bibliography  Save this paper

Competition, product differentiation and quality provision: an empirical equilibrium analysis of bank branching decisions

Author

Listed:

Abstract

We analyze the effects of market structure on the branching decisions of three types of depository institution: multimarket banks, single-market banks, and thrift institutions. We argue that additional branches increase quality for an institution's consumers, and examine the interaction between market structure and this particular measure of quality. We account for endogenous market structure using an equilibrium structural model, which corrects for bias caused by correlation in the unobservables that may drive entry and branching activity. We estimate the model using data from over 1,750 concentrated rural markets. Our results demonstrate the importance of product differentiation, as competition from multimarket banks is associated with denser branch networks for all types of firm while the opposite correlation holds when competitors are single-market banks or thrifts.

Suggested Citation

  • Andrew M. Cohen & Michael Mazzeo, 2004. "Competition, product differentiation and quality provision: an empirical equilibrium analysis of bank branching decisions," Finance and Economics Discussion Series 2004-46, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2004-46
    as

    Download full text from publisher

    File URL: http://www.federalreserve.gov/pubs/feds/2004/200446/200446abs.html
    Download Restriction: no
    File URL: http://www.federalreserve.gov/pubs/feds/2004/200446/200446pap.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    2. Jayaratne, Jith & Strahan, Philip E, 1998. "Entry Restrictions, Industry Evolution, and Dynamic Efficiency: Evidence from Commercial Banking," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 239-273, April.
    3. Demsetz, Harold, 1973. "Industry Structure, Market Rivalry, and Public Policy," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 1-9, April.
    4. Berger, Allen N. & Leusner, John H. & Mingo, John J., 1997. "The efficiency of bank branches," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 141-162, September.
    5. Vittoria Cerasi & Barbara Chizzolini & Marc Ivaldi, 2002. "Branching and competition in the European banking industry," Applied Economics, Taylor & Francis Journals, vol. 34(17), pages 2213-2225.
    6. Kim, Moshe & Vale, Bent, 2001. "Non-price strategic behavior: the case of bank branches," International Journal of Industrial Organization, Elsevier, vol. 19(10), pages 1583-1602, December.
    7. Berry, Steven T, 1992. "Estimation of a Model of Entry in the Airline Industry," Econometrica, Econometric Society, vol. 60(4), pages 889-917, July.
    8. Robert M. Adams & Kenneth P. Brevoort & Elizabeth K. Kiser, 2007. "Who Competes With Whom? The Case Of Depository Institutions," Journal of Industrial Economics, Wiley Blackwell, vol. 55(1), pages 141-167, March.
    9. Barros, Pedro Pita, 1995. "Post-entry expansion in banking: The case of Portugal," International Journal of Industrial Organization, Elsevier, vol. 13(4), pages 593-611, December.
    10. Hannan, Timothy H. & Prager, Robin A., 2004. "The competitive implications of multimarket bank branching," Journal of Banking & Finance, Elsevier, vol. 28(8), pages 1889-1914, August.
    11. Steven Berry & Joel Waldfogel, 2010. "Product Quality And Market Size," Journal of Industrial Economics, Wiley Blackwell, vol. 58(1), pages 1-31, March.
    12. Cohen, Andrew, 2004. "Market structure and market definition: the case of small market banks and thrifts," Economics Letters, Elsevier, vol. 85(1), pages 77-83, October.
    13. Bresnahan, Timothy F & Reiss, Peter C, 1991. "Entry and Competition in Concentrated Markets," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 977-1009, October.
    14. Randal Watson, 2004. "Product variety and competition in the retail market for eyeglasses," Econometric Society 2004 North American Summer Meetings 298, Econometric Society.
    15. Schmalensee, Richard, 1979. "Market Structure, Durability, and Quality: A Selective Survey," Economic Inquiry, Western Economic Association International, vol. 17(2), pages 177-196, April.
    16. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    17. Ellickson, Paul, 2005. "Supermarkets as a Natural Oligopoly," Working Papers 05-04, Duke University, Department of Economics.
    18. Robinson, William T & Chiang, Jeongwen, 1996. "Are Sutton's Predictions Robust?: Empirical Insights into Advertising, R&D, and Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 44(4), pages 389-408, December.
    19. Andrew M. Cohen, 2004. "Market structure and market definition: the case of small market banks and thrifts," Finance and Economics Discussion Series 2004-02, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Robert M. Adams & Dean F. Amel, 2007. "The effects of past entry, market consolidation, and expansion by incumbents on the probability of entry," Finance and Economics Discussion Series 2007-51, Board of Governors of the Federal Reserve System (U.S.).
    2. Goddard, John & Molyneux, Philip & Wilson, John O.S. & Tavakoli, Manouche, 2007. "European banking: An overview," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1911-1935, July.
    3. Oliveira, Marcus V.R. & Oliveira, Alessandro V.M., 2018. "What drives effective competition in the airline industry? An empirical model of city-pair market concentration," Transport Policy, Elsevier, vol. 63(C), pages 165-175.
    4. Simon, Daniel H. & Gomez, Miguel I., 2005. "The Competitive Causes and Consequences of Customer Satisfaction," 2005 Annual meeting, July 24-27, Providence, RI 19371, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    5. Arora, Ashish & Forman, Chris & Nandkumar, Anand & Telang, Rahul, 2010. "Competition and patching of security vulnerabilities: An empirical analysis," Information Economics and Policy, Elsevier, vol. 22(2), pages 164-177, May.
    6. Chenghuan Sean Chu, 2008. "The effect of satellite entry on product quality for cable television," Finance and Economics Discussion Series 2008-12, Board of Governors of the Federal Reserve System (U.S.).
    7. Roger Aliaga‐Díaz & María Pía Olivero, 2010. "Macroeconomic Implications of “Deep Habits” in Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(8), pages 1495-1521, December.
    8. Marcelo Olivares & Gérard P. Cachon, 2009. "Competing Retailers and Inventory: An Empirical Investigation of General Motors' Dealerships in Isolated U.S. Markets," Management Science, INFORMS, vol. 55(9), pages 1586-1604, September.
    9. Reka Sundaram-Stukel & Steven C Deller, 2021. "Locational Factors in the Competition between Credit Unions and Banks after the Great Recession," Papers 2110.07611, arXiv.org, revised Jul 2022.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Victor Manuel Bennett & Lamar Pierce & Jason A. Snyder & Michael W. Toffel, 2012. "Competition and Illicit Quality," Harvard Business School Working Papers 12-071, Harvard Business School, revised May 2012.
    2. John H. Boyd & Mr. Gianni De Nicolo & Abu M. Jalal, 2009. "Bank Competition, Risk, and Asset Allocations," IMF Working Papers 2009/143, International Monetary Fund.
    3. Bart Bronnenberg & Sanjay Dhar & Jean-Pierre Dubé, 2011. "Endogenous sunk costs and the geographic differences in the market structures of CPG categories," Quantitative Marketing and Economics (QME), Springer, vol. 9(1), pages 1-23, March.
    4. Bruce Lyons & Minyan Zhu, 2019. "Consumer Uptake of Internet Banking, Endogenous Market Structure and Regional Integration in Europe," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2019-04, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    5. Robert Adams & Dean Amel, 2016. "The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry in Banking," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(1), pages 95-118, February.
    6. Bruce Lyons & Minyan Zhu, 2019. "Consumer Uptake of Internet Banking, Endogenous Market Structure and Regional Integration in Europe," Economics Discussion Papers em-dp2019-14, Department of Economics, University of Reading.
    7. Victor Manuel Bennett & Lamar Pierce & Jason A. Snyder & Michael W. Toffel, 2013. "Customer-Driven Misconduct: How Competition Corrupts Business Practices," Management Science, INFORMS, vol. 59(8), pages 1725-1742, August.
    8. Andrew Cohen & Michael Mazzeo, 2010. "Investment Strategies and Market Structure: An Empirical Analysis of Bank Branching Decisions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 38(1), pages 1-21, August.
    9. Ho, Katherine & Ishii, Joy, 2011. "Location and competition in retail banking," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 537-546, September.
    10. Robert DeYoung & Evren Ors, 2004. "Advertising and pricing at multiple-output firms: evidence from U.S. thrift institutions," Working Paper Series WP-04-25, Federal Reserve Bank of Chicago.
    11. Robert M. Adams & Dean F. Amel, 2016. "The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry in Banking," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(1), pages 95-118, February.
    12. Kim, Donghyuk, 2023. "Market size, competition, and entrepreneurs’ location choices," Economics Letters, Elsevier, vol. 229(C).
    13. Matthew Gentzkow & Jesse M. Shapiro & Michael Sinkinson, 2014. "Competition and Ideological Diversity: Historical Evidence from US Newspapers," American Economic Review, American Economic Association, vol. 104(10), pages 3073-3114, October.
    14. Cagé, Julia, 2017. "Media Competition, Information Provision and Political Participation: Evidence from French Local Newspapers and Elections, 1944," CEPR Discussion Papers 12198, C.E.P.R. Discussion Papers.
    15. Julia Cagé, 2014. "Media Competition, Information Provision and Political Participation," SciencePo Working papers Main hal-03602440, HAL.
    16. Catherine Schaumans & Frank Verboven, 2015. "Entry and Competition in Differentiated Products Markets," The Review of Economics and Statistics, MIT Press, vol. 97(1), pages 195-209, March.
    17. Andrew M. Cohen & Michael Mazzeo, 2004. "Market structure and competition among retail depository institutions," Finance and Economics Discussion Series 2004-04, Board of Governors of the Federal Reserve System (U.S.).
    18. Evren Damar, H., 2007. "Does post-crisis restructuring decrease the availability of banking services? The case of Turkey," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2886-2905, September.
    19. repec:hal:spmain:info:hdl:2441/7jk88md0ar9hga662p2vjjq4kc is not listed on IDEAS
    20. Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999. "The consolidation of the financial services industry: Causes, consequences, and implications for the future," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 135-194, February.
    21. Melzer, Brian T. & Morgan, Donald P., 2015. "Competition in a consumer loan market: Payday loans and overdraft credit," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 25-44.

    More about this item

    Keywords

    Bank management; Branch banks;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2004-46. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ryan Wolfslayer ; Keisha Fournillier (email available below). General contact details of provider: https://edirc.repec.org/data/frbgvus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.