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Market size, service quality, and competition in banking

Author: Dick, Astrid A. INSEAD Area: Economics and Political ScienceIn: Journal of Money Credit and Banking, vol. 39, no. 1, February 2007 Language: EnglishDescription: p. 49-81.Type of document: INSEAD ArticleNote: Please ask us for this itemAbstract: Local banking markets depict enormous variation in population size. Yet this paper finds that the nature of bank competition across markets is strikingly similar. First, markets remain similarly concentrated regardless of size. Second, the number of dominant banks is roughly constant across markets of different size; it is the number of fringe banks that increases with markets size. Third, service quality increases in larger markets and is higher for dominant banks. The findings suggest that banks use fixed-cost quality investments to capture the additional demand when market size grows, thereby raising barriers to entry.
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INSEAD Article Europe Campus
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Local banking markets depict enormous variation in population size. Yet this paper finds that the nature of bank competition across markets is strikingly similar. First, markets remain similarly concentrated regardless of size. Second, the number of dominant banks is roughly constant across markets of different size; it is the number of fringe banks that increases with markets size. Third, service quality increases in larger markets and is higher for dominant banks. The findings suggest that banks use fixed-cost quality investments to capture the additional demand when market size grows, thereby raising barriers to entry.

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