Product differentiation and efficiencies in the retail banking industry

Mian Dai and Yuan Yuan

Journal of Banking & Finance, 2013, vol. 37, issue 12, 4907-4919

Abstract: We empirically quantify the welfare implications of bank entry in the United States between 2000 and 2008. We use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes. We find no evidence for under- or over-entry. Compared with the socially efficient outcome, there is a mild welfare loss resulting from banks entering wrong locations in product space. Compared with the observed outcome, consumer surplus drops by 20–38% and bank profits decline by 48–59% when banks are homogeneous. Therefore product differentiation significantly improves welfare under free entry.

Keywords: Banking; Welfare; Demand; Entry; Competition; Product differentiation (search for similar items in EconPapers)
JEL-codes: G21 L11 L89 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:12:p:4907-4919

DOI: 10.1016/j.jbankfin.2013.09.005

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