Switching Cost and Deposit Demand in China
Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 06/2014
International Economic Review, Volume 56, Issue 3, August 2015, Pages 723-749
44 Pages Posted: 25 Mar 2014 Last revised: 29 Jul 2022
There are 2 versions of this paper
Switching Cost and Deposit Demand in China
Switching Cost and Deposit Demand in China
Date Written: March 23, 2014
Abstract
This working paper was written by Chun-Yu Ho (Shanghai Jiao Tong University).
This paper develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time. Existing consumers are forward-looking and incur a fixed cost for switching banks, whereas incoming consumers are forward-looking but do not incur any cost for joining a bank. The main finding is that consumers prefer banks with more employees and branches. The switching cost is approximately 0.8% of the deposit’s value, which leads the static model to bias the demand estimates. The dynamic model shows that the price elasticity over a long time horizon is substantially larger than the same elasticity over a short time horizon. Counterfactual experiments with a dynamic monopoly show that reducing the switching cost has a comparable competitive effect on bank pricing as a result of reducing the dominant position of the monopoly.
Keywords: Banks in China, Demand Estimation, Switching Cost
JEL Classification: G21, L10
Suggested Citation: Suggested Citation
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