Assessing Bank Deposit Market Power Given Limited Consumer Consideration
79 Pages Posted: 6 Aug 2019 Last revised: 15 Oct 2019
Date Written: October 14, 2019
Accurate assessments of bank deposit market power are essential for antitrust and monetary policy. Regulators and researchers have traditionally measured market power assuming all consumers consider every bank operating in a given geographic region. However, these measures are generally biased because, in practice, consumers only consider a small fraction of the available banks. I propose a new model of bank deposit competition that provides a market power measure that accounts for consumers' limited consideration of banks. I estimate the model for the twenty largest US Metropolitan Statistical Areas over 2004 to 2018 using rich data on bank deposit interest rates, bank advertising, and the distance between consumers and bank branch locations. Accounting for consumers' limited consideration shows that traditional measures underestimate the market power of online direct banks, poorly capture how market power contributes to heterogeneous bank pass through of federal funds rate changes, and support an inefficient proposal for strengthening bank competition. Whereas assuming full consideration recommends further bank deregulation, I find that the best plan for strengthening competition is to facilitate the launch of an online direct bank by a major technology company.
Keywords: Bank Deposit Competition; Market Power; Consideration Sets
JEL Classification: G21; L11; L15; E44
Suggested Citation: Suggested Citation