Product differentiation and efficiencies in the retail banking industry |
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Authors: | Mian Dai Yuan Yuan |
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Affiliation: | 1. Department of Economics and International Business, LeBow College of Business, Drexel University, Philadelphia, PA 19104, United States;2. REO Servicing Capital Analytics, Freddie Mac, Mclean, VA, United States |
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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. |
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Keywords: | G21 L11 L89 |
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