Technological Transformation and Nonbank Competition in a Model of Retail Banking Oligopoly
A model of banking competition is developed, in which diffusion of electronic banking (eg pc and phone banking) and nonbank competition (eg mutual funds, retail stores and insurance firms) are studied as factors that diminish the benefits of branch and ATM networks in terms of enhanced demand and pricing power. A structural increase in price competition, a decrease in the variation of loan and deposit rates across banks and a decline in the optimal numbers of branches and ATMs is shown to result. Competition increases permanently unless banks are able to redifferentiate from rivals through novel innovation that compensates for the reduced value of network differentatiation. Capacity collusion is shown to reduce the sizes of branch and ATM networks as well as banks' markups of loan and deposit rates over the money market rate and respective marginal operating costs. ATM compatibility reduces the total number of machines and under certain conditions raises deposit rates. Under strategic complementarity technological transformation and nonbank expansion enhance the transmission of monetary policy into lending rates, as well as into deposit rates, because banks' incentives to change their rates and the sizes of optimal responses increase with respect to changes in the money market rate. If these trends continue to be more pronounced on the deposit side, loan rates will become more insulated from deposit market events and the volatility of banks' netinterest income will increase.
|Date of creation:||11 May 1998|
|Date of revision:|
|Contact details of provider:|| Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland|
Web page: http://www.suomenpankki.fi/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.:
- Paul S. Calem & Leonard I. Nakamura, 1994.
"Branch banking and the geography of bank pricing,"
94-19, Federal Reserve Bank of Philadelphia.
- Avner Shaked & John Sutton, 1990. "Multiproduct Firms and Market Structure," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 45-62, Spring.
- Rotemberg, Julio J & Saloner, Garth, 1987.
"The Relative Rigidity of Monopoly Pricing,"
American Economic Review,
American Economic Association, vol. 77(5), pages 917-26, December.
- Julio Rotemberg & Garth Saloner, 1986. "The Relative Rigidity of Monopoly Pricing," Working papers 414, Massachusetts Institute of Technology (MIT), Department of Economics.
- Julio J. Rotemberg & Garth Saloner, 1986. "The Relative Rigidity of Monopoly Pricing," NBER Working Papers 1943, National Bureau of Economic Research, Inc.
- Timothy H. Hannan & Allen N. Berger, 1989. "Price rigidity and market structure: theory and evidence from the banking industry," Finance and Economics Discussion Series 59, Board of Governors of the Federal Reserve System (U.S.).
- Bulow, Jeremy I & Geanakoplos, John D & Klemperer, Paul D, 1985. "Multimarket Oligopoly: Strategic Substitutes and Complements," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 488-511, June.
- Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995.
"Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates,"
European Economic Review,
Elsevier, vol. 39(5), pages 889-918, May.
- Chiappori, P.A. & Perez-Castrillo, D. & Verdier, T., 1992. "Spatial Competition in the Banking System: Localization, Cross Subsidies and the Regulation of Deposit Rates," DELTA Working Papers 92-15, DELTA (Ecole normale supérieure).
- Degryse, H.A., 1996.
"On the interaction between vertical and horizontal product differentiation : An application to banking,"
Other publications TiSEM
384e9355-ea79-4b3e-90cb-1, Tilburg University, School of Economics and Management.
- Degryse, Hans, 1996. "On the Interaction between Vertical and Horizontal Product Differentiation: An Application to Banking," Journal of Industrial Economics, Wiley Blackwell, vol. 44(2), pages 169-86, June.
- Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
- Akihiko Matsui, 1987. "Consumer-Benefited Cartels Under Strategic Capital Investment Competition," Discussion Papers 798, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- Robert C. Feenstra & James A. Levinsohn, 1995. "Estimating Markups and Market Conduct with Multidimensional Product Attributes," Review of Economic Studies, Oxford University Press, vol. 62(1), pages 19-52.
- James J. McAndrews, 1992. "Results of a survey of ATM network pricing," Working Papers 92-7, Federal Reserve Bank of Philadelphia.
- Matusui, Akihiko, 1989. "Consumer-benefited cartels under strategic capital investment competition," International Journal of Industrial Organization, Elsevier, vol. 7(4), pages 451-470, December.
- Simon P. Anderson & André De Palma & Jacques-François Thisse, 1989. "Demand for Differentiated Products, Discrete Choice Models, and the Characteristics Approach," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 21-35.
- Degryse, H.A., 1995.
Other publications TiSEM
86ac7d31-714b-4389-bded-2, Tilburg University, School of Economics and Management.
- Frances X. Frei & Patrick T. Harker & Larry W. Hunter, . "Innovation in Retail Banking," Center for Financial Institutions Working Papers 97-48, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Dixit, Avinash K, 1986. "Comparative Statics for Oligopoly," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 107-22, February.
- Neven, Damien J, 1989. "Structural Adjustment in European Retail Banking: Some Views from Industrial Organisation," CEPR Discussion Papers 311, C.E.P.R. Discussion Papers.
- Fershtman, Chaim & Gandal, Neil, 1994.
International Journal of Industrial Organization,
Elsevier, vol. 12(2), pages 141-154, June.
- David B. Humphrey, 1994. "Delivering deposit services: ATMs versus branches," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 59-81.
- Dornbusch, Rudiger & Favero, Carlo A. & Giavazzi, Francesco, 1998. "A Red Letter Day?," CEPR Discussion Papers 1804, C.E.P.R. Discussion Papers.
- Besanko, David & Thakor, Anjan V., 1992. "Banking deregulation: Allocational consequences of relaxing entry barriers," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 909-932, September.
- Schmid, Frank A, 1994. "Should Bank Branching Be Regulated? Theory and Empirical Evidence from Four European Countries," Journal of Regulatory Economics, Springer, vol. 6(2), pages 137-49, May.
- Pulley, Lawrence B & Humphrey, David B, 1993. "The Role of Fixed Costs and Cost Complementarities in Determining Scope Economies and the Cost of Narrow Banking Proposals," The Journal of Business, University of Chicago Press, vol. 66(3), pages 437-62, July.
- Mester, Loretta J, 1987. "Multiple Market Contact between Savings and Loans: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(4), pages 538-49, November.
When requesting a correction, please mention this item's handle: RePEc:hhs:bofrdp:1998_008. 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: (Minna Nyman)
If references are entirely missing, you can add them using this form.