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Switching cost and deposit demand in China

  • Ho, Chun-Yu

    ()

    (BOFIT)

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.

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File URL: http://www.suomenpankki.fi/bofit/tutkimus/tutkimusjulkaisut/dp/Documents/2014/dp0914.pdf
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 9/2014.

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Length: 48 pages
Date of creation: 25 Mar 2014
Date of revision:
Handle: RePEc:hhs:bofitp:2014_009
Contact details of provider: Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
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