IDEAS home Printed from https://ideas.repec.org/p/sef/csefwp/32.html
   My bibliography  Save this paper

Spatial Competition in Credit Markets

Author

Listed:
  • Heidrun C. Hoppe

    (Universität Hamburg and CSEF, University of Salerno)

  • Ulrich Lehmann-Grube

    (Universität Hamburg)

Abstract

Using Hotelling's two-stage model of spatial competition, we develop a lending model where the equilibrium outcome may be characterized by maximal differentiation - in contrast to Hotelling's model where firms have an incentive to reduce differentiation, as long as a pure-strategy price equilibrium exists. The difference is due to the specificities of banks' activities: banks perform independent tests to assess the credit-worthiness of their loan applicants, and thereby create a nongeographic customer heterogeneity. If banks are sufficiently pessimistic about the credit-worthiness of firms, they try to minimize the risk of default by moving away from the market center

Suggested Citation

  • Heidrun C. Hoppe & Ulrich Lehmann-Grube, 2000. "Spatial Competition in Credit Markets," CSEF Working Papers 32, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:32
    as

    Download full text from publisher

    File URL: http://www.csef.it/WP/wp32.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Osborne, Martin J & Pitchik, Carolyn, 1987. "Equilibrium in Hotelling's Model of Spatial Competition," Econometrica, Econometric Society, vol. 55(4), pages 911-922, July.
    2. Economides, Nicholas & Hubbard, R Glenn & Palia, Darius, 1996. "The Political Economy of Branching Restrictions and Deposit Insurance: A Model of Monopolistic Competition among Small and Large Banks," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 667-704, October.
    3. 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.
    4. William Alonso, 1967. "A Reformulation Of Classical Location Theory And Its Relation To Rent Theory," Papers in Regional Science, Wiley Blackwell, vol. 19(1), pages 23-44, January.
    5. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    6. de Palma, A, et al, 1985. "The Principle of Minimum Differentiation Holds under Sufficient Heterogeneity," Econometrica, Econometric Society, vol. 53(4), pages 767-781, July.
    7. repec:ulb:ulbeco:2013/1759 is not listed on IDEAS
    8. Gehrig, Thomas, 1998. "Screening, cross-border banking, and the allocation of credit," Research in Economics, Elsevier, vol. 52(4), pages 387-407, December.
    9. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, vol. 47(5), pages 1145-1150, September.
    10. Nicholas Economides, 1986. "Nash Equilibrium in Duopoly with Products Defined by Two Characteristics," RAND Journal of Economics, The RAND Corporation, vol. 17(3), pages 431-439, Autumn.
    11. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-452, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Torbenko, A., 2015. "Linear City Models: Overview and Typology," Journal of the New Economic Association, New Economic Association, vol. 25(1), pages 12-38.
    2. Hyytinen, Ari, 2003. "Information production and lending market competition," Journal of Economics and Business, Elsevier, vol. 55(3), pages 233-253.
    3. Ralph Braid, 2014. "The socially optimal and equilibrium locations of two stores or libraries with consumer search," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 53(1), pages 123-136, August.
    4. Caplin, Andrew & Nalebuff, Barry, 1991. "Aggregation and Imperfect Competition: On the Existence of Equilibrium," Econometrica, Econometric Society, vol. 59(1), pages 25-59, January.
    5. Kuangnen Cheng & Hui-Ping Chen & Jason Lee, 2015. "Competition behavior in service frequency for U.S. airlines," Service Business, Springer;Pan-Pacific Business Association, vol. 9(1), pages 1-16, March.
    6. Gaëtan Fournier & Marco Scarsini, 2014. "Hotelling Games on Networks: Efficiency of Equilibria," Documents de travail du Centre d'Economie de la Sorbonne 14033, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    7. Ralph Braid, 2013. "The locations of firms on intersecting roadways," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 50(3), pages 791-808, June.
    8. Hyytinen, Ari, 2001. "Information Production, Banking Competition and the Market Structure of the Banking Industry," Discussion Papers 749, The Research Institute of the Finnish Economy.
    9. Heidrun Hoppe & Ulrich Lehmann-Grube, 2008. "Price competition in markets with customer testing: the captive customer effect," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(3), pages 497-521, June.
    10. Borenstein, Severin & Netz, Janet, 1999. "Why do all the flights leave at 8 am?: Competition and departure-time differentiation in airline markets," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 611-640, July.
    11. Moscarini, Giuseppe & Ottaviani, Marco, 2001. "Price Competition for an Informed Buyer," Journal of Economic Theory, Elsevier, vol. 101(2), pages 457-493, December.
    12. Lehner, Maria & Schnitzer, Monika, 2008. "Entry of foreign banks and their impact on host countries," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 430-452, September.
    13. Robert Hauswald & Robert Marquez, 2000. "Relationship Banking and Competition under Differentiated Asymmetric Information," Center for Financial Institutions Working Papers 00-13, Wharton School Center for Financial Institutions, University of Pennsylvania.
    14. Cordella, Tito & Yeyati, Eduardo Levy, 2002. "Financial opening, deposit insurance, and risk in a model of banking competition," European Economic Review, Elsevier, vol. 46(3), pages 471-485, March.
    15. Heijnen, Pim & Soetevent, Adriaan R., 2018. "Price competition on graphs," Journal of Economic Behavior & Organization, Elsevier, vol. 146(C), pages 161-179.
    16. Hinloopen, Jeroen & Müller, Wieland & Normann, Hans-Theo, 2014. "Output commitment through product bundling: Experimental evidence," European Economic Review, Elsevier, vol. 65(C), pages 164-180.
    17. Hinloopen, Jeroen & Martin, Stephen, 2017. "Costly location in Hotelling duopoly," Research in Economics, Elsevier, vol. 71(1), pages 118-128.
    18. Degryse, H.A. & Cerqueiro, G.M. & Ongena, S., 2007. "Distance, Bank Organizational Structure and Credit," Other publications TiSEM 34c2f607-3395-4fd9-9c52-4, Tilburg University, School of Economics and Management.
    19. Claudia M. Buch & Stefan M. Golder, 2000. "Foreign competition and disintermediation: no threat to the German banking system?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 53(213), pages 107-133.
    20. Buechel, Berno & Roehl, Nils, 2015. "Robust equilibria in location games," European Journal of Operational Research, Elsevier, vol. 240(2), pages 505-517.

    More about this item

    Keywords

    Banking competition; Hotelling; information acquisition; credit-worthiness tests;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:32. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Dr. Maria Carannante (email available below). General contact details of provider: https://edirc.repec.org/data/cssalit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.