Quantifying Inertia in Retail Deposit Markets

55 Pages Posted: 31 May 2017 Last revised: 2 Jun 2017

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2016

Abstract

This paper investigates inertia within and across banks in retail deposit markets using detailed panel data on consumer choices and account characteristics. In a structural choice model, I find that costs of inertia are around one third higher for switching accounts across compared to switching within banks. Observable proxies of bank-level switching costs (number and type of additional financial products) explain most of this cost premium, while online banking usage reduces inertia. Consistent with theory, I provide evidence that banks incorporate inertia in their pricing as older accounts pay lower rates than comparable newer accounts. Counterfactual policies reducing inertia shift market share to more competitive smaller banks, but only eliminating inertia within banks already results in high potential gains in consumer surplus. This suggests that facilitating bank switching alone might be insufficient to improve consumer choices.

Keywords: Deposit market, switching, inertia, consumer choice, industrial organization

JEL Classification: D12, G11, G21, L16

Suggested Citation

Deuflhard, Florian, Quantifying Inertia in Retail Deposit Markets (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=2978102 or http://dx.doi.org/10.2139/ssrn.2978102

Florian Deuflhard (Contact Author)

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessia 60323
Germany

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