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Switching Cost and Deposit Demand in China

Chun-Yu Ho ()

No 62014, Working Papers from Hong Kong Institute for Monetary Research

Abstract: 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.

Keywords: Banks in China; Demand Estimation; Switching Cost (search for similar items in EconPapers)
JEL-codes: G21 L10 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2014-03
New Economics Papers: this item is included in nep-ban, nep-com and nep-tra
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: SWITCHING COST AND DEPOSIT DEMAND IN CHINA (2015) Downloads
Working Paper: Switching cost and deposit demand in China (2014) Downloads
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