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Banks as ‘fat cats’: Branching and Price Decisions in a Two-Stage Model of Competition

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  • COCCORESE, Paolo

    () (CELPE - Centre of Labour Economics and Economic Policy, University of Salerno - Italy)

Abstract

In this paper we develop an empirical two-stage model of competition for the banking industry that incorporates the choice of capacity in the form of new branches. It is estimated using data on Italian banks for the years 1995-2009. The results show that the conduct of banks is significantly more competitive than a Bertrand-Nash equilibrium, and support the rejection of the simple one-stage specification, which underestimates the degree of competition. In the Fudenberg and Tirole (1984)’s taxonomy, banks are found to behave as ‘fat cats’, overinvesting in the branch network so as to keep prices high and accommodate entry.

Suggested Citation

  • COCCORESE, Paolo, 2011. "Banks as ‘fat cats’: Branching and Price Decisions in a Two-Stage Model of Competition," CELPE Discussion Papers 118, CELPE - Centre of Labour Economics and Economic Policy, University of Salerno, Italy.
  • Handle: RePEc:sal:celpdp:0118
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    Cited by:

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    More about this item

    Keywords

    bank branch network; competition; market structure; conduct;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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