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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page Competition, Product Differentiation and Quality Provision: An Empirical Equilibrium Analysis of Bank Branching Decisions
Andrew Cohen and Michael J. Mazzeo

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: Market structure, entry, bank, thrifts

Full paper (395 KB PDF)

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Last update: August 26, 2004