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Consumer switching costs and firm pricing: evidence from bank pricing of deposit accounts

  • Timothy H. Hannan

This 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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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2008-32.

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Date of creation: 2008
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Handle: RePEc:fip:fedgfe:2008-32
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  1. Farrell, Joseph & Klemperer, Paul, 2006. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," CEPR Discussion Papers 5798, C.E.P.R. Discussion Papers.
  2. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
  3. Calem, Paul S & Carlino, Gerald A, 1991. "The Concentration/Conduct Relationship in Bank Deposit Markets," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 268-76, May.
  4. Allen N. Berger & Timothy H. Hannan, 1988. "The price-concentration relationship in banking," Finance and Economics Discussion Series 23, Board of Governors of the Federal Reserve System (U.S.).
  5. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  6. Timothy H. Hannan & Elizabeth K. Kiser & Robin A. Prager & James J. McAndrews, 2003. "To Surcharge or Not to Surcharge: An Empirical Investigation of ATM Pricing," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 990-1002, November.
  7. Elizabeth Kiser, 2002. "Predicting Household Switching Behavior and Switching Costs at Depository Institutions," Review of Industrial Organization, Springer, vol. 20(4), pages 349-365, June.
  8. Moshe Kim & Doron Kliger & Bent Vale, 2001. "Estimating Switching Costs and Oligopolistic Behavior," Center for Financial Institutions Working Papers 01-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. 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.
  10. Dean F. Amel & Martha Starr-McCluer, 2001. "Market definition in banking: recent evidence," Finance and Economics Discussion Series 2001-16, Board of Governors of the Federal Reserve System (U.S.).
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