Switching Cost and Deposit Demand in China

HKIMR Working Paper No.06/2014

44 Pages Posted: 25 Mar 2014

See all articles by Chun-Yu Ho

Chun-Yu Ho

State University of New York (SUNY) - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: March 23, 2014

Abstract

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

Ho, Chun-Yu, Switching Cost and Deposit Demand in China (March 23, 2014). HKIMR Working Paper No.06/2014, Available at SSRN: https://ssrn.com/abstract=2413308 or http://dx.doi.org/10.2139/ssrn.2413308

Chun-Yu Ho (Contact Author)

State University of New York (SUNY) - Department of Economics ( email )

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Albany, NY 12222
United States

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