Consumer Switching Costs and Firm Pricing: Evidence from Bank Pricing of Deposit Accounts

Abstract

We employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs. We argue that, because of the trade‐off between attracting new customers and exploiting old ones, banks offer higher deposit rates in areas experiencing more in‐migration. Further, because greater out‐migration implies that a locked‐in customer will not be with the bank for as many periods, banks will offer lower deposit rates in areas exhibiting greater out‐migration. Also, because this effect of out‐migration logically depends on the extent of in‐migration, an interaction effect exists. We find evidence strongly supporting these relationships.