Banks as ‘fat cats’: Branching and price decisions in a two-stage model of competition

Abstract

a b s t r a c tIn this paper we develop an empirical two-stage model of price competition for the banking industry that incorporates the choice of capacity in the form of new branches. This is achieved by supplementing the customary two-equation framework (demand plus first-order condition in the loan market) with the addition of a third equation that endogenizes the investment decision regarding the branch network. The model is estimated using data on a group of large and medium Italian banks for the years 1995-2009. The results show that the conduct of banks is significantly more competitive than a Bertrand-Nash equilibrium, and support the rejection of the simple one-stage specification, which underestimates the degree of competition. In the taxonomy of Fudenberg and Tirole (1984), the banks in the sample are found to behave as 'fat cats', overinvesting in the branch network so as to keep prices high and accommodate entry.

Keep walking? Geographical proximity, religion, and relationship banking

“…Larger and foreign-owned banks, on the other hand, rely more on hard(ened) information and 4 Extant work on bank branch proximity studies the effects of bank distress and/or mergers − and subsequent local branch reconfigurations and closures − on local development and crime (Garmaise and Moskowitz (2005)) and in general on competition, borrowers` access to credit and switching behavior (e.g., Kim and Vale (2001), Cerasi, Chizzolini and Ivaldi (2002), Sapienza (2002), Degryse, Masschelein and Mitchell (2011), Temesvary (2015)) and welfare (Slovin, Sushka and Polonchek (1993), Karceski, Ongena and Smith (2005)). On (de-)branching itself see e.g., De Juan (2003), Cerutti, Dell'Ariccia and Martínez Pería (2007), Coccorese (2012), and recently Martin-Oliver (2016), Bonfim, Nogueira and Ongena (2017) and Qi, De Haas, Ongena and Straetmans (2017). can therefore afford to be geographically further away from their clients (e.g., Berger et al (2005)).…”

Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches

“…Syverson (2004), for example, extends the Salop model to allow for heterogeneous producer costs and adds asymmetric information among producers about their production costs. Our assumptions are less stringent than those in the Salop (1979) model that is used extensively in the literature allows banks with larger branch networks to charge an interest-rate premium, while Coccorese (2012) incorporates branch decisions in a price competition model. on bank competition (see Barros, 1999;Dell'Ariccia, 2001 andKim, Lozano-Vivas andMorales, 2007).…”

Keep Walking? Geographical Proximity, Religion, and Relationship Banking

“…Larger and foreign-owned banks, on the other hand, rely more on hard(ened) information and 4 Extant work on bank branch proximity studies the effects of bank distress and/or mergers − and subsequent local branch reconfigurations and closures − on local development and crime (Garmaise and Moskowitz (2005)) and in general on competition, borrowers` access to credit and switching behavior (e.g., Kim and Vale (2001), Cerasi, Chizzolini and Ivaldi (2002), Sapienza (2002), Degryse, Masschelein and Mitchell (2011), Temesvary (2015)) and welfare (Slovin, Sushka and Polonchek (1993), Karceski, Ongena and Smith (2005)). On (de-)branching itself see e.g., De Juan (2003), Cerutti, Dell'Ariccia and Martínez Pería (2007), Coccorese (2012), and recently Martin-Oliver (2016), Bonfim, Nogueira and Ongena (2017) and Qi, De Haas, Ongena and Straetmans (2017). can therefore afford to be geographically further away from their clients (e.g., Berger et al (2005)).…”