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

25 Pages Posted: 28 Jun 2011

See all articles by Timothy H. Hannan

Timothy H. Hannan

Board of Governors of the Federal Reserve System

Robert M. Adams

Board of Governors of the Federal Reserve System

Date Written: June 2011

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.

Suggested Citation

Hannan, Timothy and Adams, Robert M., Consumer Switching Costs and Firm Pricing: Evidence from Bank Pricing of Deposit Accounts (June 2011). The Journal of Industrial Economics, Vol. 59, Issue 2, pp. 296-320, 2011, Available at SSRN: https://ssrn.com/abstract=1873771 or http://dx.doi.org/10.1111/j.1467-6451.2011.00456.x

Timothy Hannan (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Robert M. Adams

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2653 (Phone)

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