Search cost and price dispersion in vertically related markets: the case of bank loans and deposits

Search cost and price dispersion in vertically related markets: the case of bank loans and deposits

Serie: Documentos de Trabajo. 0825.

Autor: Alfredo Martín-Oliver, Vicente Salas-Fumás y Jesús Saurina.

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Search cost and price dispersion in vertically related markets: the case of bank loans and deposits (574 KB)

Resumen

Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer's search costs in retail banking, consistent with predictions from the Carlson and McAfee (1983) model of market competition with search costs.

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