BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Switching cost and deposit demand in China
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; (follow links to similar papers)
JEL-Codes: G21; L10; (follow links to similar papers)
48 pages, March 25, 2014
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