Working Paper

Competition, product differentiation and quality provision: an empirical equilibrium analysis of bank branching decisions

Abstract: We analyze the effects of market structure on the branching decisions of three types of depository institution: multimarket banks, single-market banks, and thrift institutions. We argue that additional branches increase quality for an institution's consumers, and examine the interaction between market structure and this particular measure of quality. We account for endogenous market structure using an equilibrium structural model, which corrects for bias caused by correlation in the unobservables that may drive entry and branching activity. We estimate the model using data from over 1,750 concentrated rural markets. Our results demonstrate the importance of product differentiation, as competition from multimarket banks is associated with denser branch networks for all types of firm while the opposite correlation holds when competitors are single-market banks or thrifts.

Keywords: Bank management; Branch banks;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2004

Number: 2004-46