The Effect of Consumer Switching Costs on Prices: A Theory and its Application to the Bank Deposit Market |
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Authors: | Sharpe Steven A |
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Institution: | 1. Board of Governors of the Federal Reserve System, Washington, D.C, 20551, U.S.A
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Abstract: | As demonstrated by Klemperer (1987), if households face a cost of switching among brands of a differentiated good, pricing is likely to be more competitive, the greater is the fraction of customers that move into or around the market. I generalize this theory to a world with arbitrary market structure and test it empirically using panel data on bank retail deposit interest rates. I find that the amount of household migration in a market has a significant competitive influence on price markups, that is, a positive effect on the level of deposit interest rates. Consistent with the model, the magnitude of this effect depends in some cases upon the degree of market concentration. |
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