Switching Costs and Network Externalities in the Production of Payment Services

Eero Lehto

No 166, Working Papers from Työn ja talouden tutkimus LABORE, Labour Institute for Economic Research LABORE

Abstract: This study considers the retail banking duopoly in the production of payment services. Switching costs make the old clients locked-in. Network externalities are exhibited ude to high transaction costs in making a transfer to another bank´s customer, and due to low marginal costs in processing an intrabank transfer. This makes the discounted marginal profits from the old clientele increase in the number of old clients that favours a larger bank. This can encourage the larger bank to capture the new clients which are free of scitching costs, even if price discrimination between old and young clients in not allowed. To obtain this result, requires, however, that a maximal price premium extracted from a payment transfer to another bank´s customer is small enough. Thus the ordinary result according to which, it is too big sacrifice for a larger bank to lower also the prices of the old clients in order to capture the new clients, can be reserved.

Keywords: retail banking; switching costs; network externality (search for similar items in EconPapers)
JEL-codes: G21 L11 L12 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2000-05-18
References: Add references at CitEc
Citations:

Downloads: (external link)
https://labore.fi/wp-content/uploads/2000/05/Tyopapereita-166.pdf First version, 2000 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pst:wpaper:166

Access Statistics for this paper

More papers in Working Papers from Työn ja talouden tutkimus LABORE, Labour Institute for Economic Research LABORE Contact information at EDIRC.
Bibliographic data for series maintained by Aila Mustonen ().