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SWITCHING COST AND DEPOSIT DEMAND IN CHINA
Author(s) -
Ho ChunYu
Publication year - 2015
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12120
Subject(s) - monopoly , counterfactual thinking , economics , price elasticity of demand , elasticity (physics) , microeconomics , product differentiation , time horizon , monetary economics , econometrics , cournot competition , philosophy , materials science , epistemology , finance , composite material
This article develops and estimates a dynamic model of consumer demand for deposits in which banks provide differentiated products and product characteristics that evolve over time. The switching cost is 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 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.