Switching cost and deposit demand in China
This paper develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time. Existing consumers are forward-looking and incur a fixed cost for switching banks, whereas incoming consumers are forward-looking but do not incur any cost for joining a bank. The main finding is that consumers prefer banks with more employees and branches. The switching cost is approximately 0.8% of the deposit’s value, which leads the static model to bias the demand estimates. The dynamic model shows that the price elasticity over a long time horizon is substantially larger than the same elasticity over a short time horizon. Counterfactual experiments with a dynamic monopoly show that reducing the switching cost has a comparable competitive effect on bank pricing as a result of reducing the dominant position of the monopoly.
|Date of creation:||25 Mar 2014|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
Web page: http://www.suomenpankki.fi/bofit_en/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
- Chun-Yu Ho, 2010.
"Deregulation, competition and consumer welfare in a banking market: evidence from Hong Kong,"
Journal of Regulatory Economics,
Springer, vol. 37(1), pages 70-97, February.
- Chun-Yu Ho, 2007. "Deregulation, Competition and Consumer Welfare in Banking Market: Evidence from Hong Kong," Working Papers 242007, Hong Kong Institute for Monetary Research.
- Ho, Chun-Yu, 2009.
"Market Structure, Welfare, and Banking Reform in China,"
BOFIT Discussion Papers
19/2009, Bank of Finland, Institute for Economies in Transition.
- Ho, Chun-Yu, 2012. "Market structure, welfare, and banking reform in China," Journal of Comparative Economics, Elsevier, vol. 40(2), pages 291-313.
- Chun-Yu Ho, 2009. "Market Structure, Welfare, and Banking Reform in China," Working Papers 302009, Hong Kong Institute for Monetary Research.
- Robert Clark & Jason Allen & Jean-Francois Houde, 2008. "Market Structure and the diffusion of electronic banking," 2008 Meeting Papers 1015, Society for Economic Dynamics.
- John Shea, 1996.
"Instrument Relevance in Multivariate Linear Models: A Simple Measure,"
NBER Technical Working Papers
0193, National Bureau of Economic Research, Inc.
- John Shea, 1997. "Instrument Relevance in Multivariate Linear Models: A Simple Measure," The Review of Economics and Statistics, MIT Press, vol. 79(2), pages 348-352, May.
- Cull, Robert & Xu, Lixin Colin, 2003. "Who gets credit? The behavior of bureaucrats and state banks in allocating credit to Chinese state-owned enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 533-559, August.
- 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.
- Timothy H. Hannan, 2008. "Consumer switching costs and firm pricing: evidence from bank pricing of deposit accounts," Finance and Economics Discussion Series 2008-32, Board of Governors of the Federal Reserve System (U.S.).
- Robert G. King & Ross Levine, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 717-737.
- Chun-Yu Ho, 2014.
"Switching Cost and Deposit Demand in China,"
062014, Hong Kong Institute for Monetary Research.
- Pasquale Schiraldi, 2011.
"Automobile replacement: a dynamic structural approach,"
RAND Journal of Economics,
RAND Corporation, vol. 42(2), pages 266-291, 06.
- Pasquale Schiraldi, 2010. "Automobile Replacement: A DynamicStructural Approach," STICERD - Economics of Industry Papers 49, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Pasquale Schiraldi, 2008. "Automobile replacement: a dynamic structural approach," LSE Research Online Documents on Economics 21780, London School of Economics and Political Science, LSE Library.
- Park, Albert & Sehrt, Kaja, 2001.
"Tests of Financial Intermediation and Banking Reform in China,"
Journal of Comparative Economics,
Elsevier, vol. 29(4), pages 608-644, December.
- Albert Park and Kaja Sehrt & Albert Park and Kaja Sehrt, 1999. "Tests of Financial Intermediation and Banking Reform in China," William Davidson Institute Working Papers Series 270, William Davidson Institute at the University of Michigan.
- Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
- Thierry Magnac & David Thesmar, 2002. "Identifying Dynamic Discrete Decision Processes," Econometrica, Econometric Society, vol. 70(2), pages 801-816, March.
- Robert M. Adams & Kenneth P. Brevoort & Elizabeth K. Kiser, 2005. "Who competes with whom? the case of depository institutions," Finance and Economics Discussion Series 2005-03, Board of Governors of the Federal Reserve System (U.S.).
- Cull, Robert & Xu, Lixin Colin, 2000. "Bureaucrats, State Banks, and the Efficiency of Credit Allocation: The Experience of Chinese State-Owned Enterprises," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 1-31, March.
- József Molnár & Márton Nagy & Csilla Horváth, 2007. "A Structural Empirical Analysis of Retail Banking Competition: the Case of Hungary," MNB Working Papers 2007/1, Magyar Nemzeti Bank (Central Bank of Hungary).
- Gautam Gowrisankaran & Marc Rysman, 2012. "Dynamics of Consumer Demand for New Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1173 - 1219.
- repec:tpr:qjecon:v:108:y:1993:i:3:p:717-37 is not listed on IDEAS
- Wendy Dobson & Anil K. Kashyap, 2006. "The Contradiction in China's Gradualist Banking Reforms," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 37(2), pages 103-162.
- Dick, Astrid A., 2008. "Demand estimation and consumer welfare in the banking industry," Journal of Banking & Finance, Elsevier, vol. 32(8), pages 1661-1676, August.
- Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
- Robin S. Lee, 2013. "Vertical Integration and Exclusivity in Platform and Two-Sided Markets," American Economic Review, American Economic Association, vol. 103(7), pages 2960-3000, December.
- 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.).
- Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
- Aviv Nevo, 2000. "Mergers with Differentiated Products: The Case of the Ready-to-Eat Cereal Industry," RAND Journal of Economics, The RAND Corporation, vol. 31(3), pages 395-421, Autumn.
- Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
- King, Robert G. & Levine, Ross, 1993.
"Finance and growth : Schumpeter might be right,"
Policy Research Working Paper Series
1083, The World Bank.
- 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.
- Hao, Chen, 2006. "Development of financial intermediation and economic growth: The Chinese experience," China Economic Review, Elsevier, vol. 17(4), pages 347-362.
- Ho, Katherine & Ishii, Joy, 2011. "Location and competition in retail banking," International Journal of Industrial Organization, Elsevier, vol. 29(5), pages 537-546, September.
- 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.
When requesting a correction, please mention this item's handle: RePEc:hhs:bofitp:2014_009. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Päivi Määttä)
If references are entirely missing, you can add them using this form.