A computational dynamic model of strategic behavior in the US retail banking market

Abstract

This paper examines the dynamics of bank strategies and performance in retail deposit markets. I develop an infinite-horizon computational dynamic equilibrium duopoly model of value-maximizing banks. It is used to analyze several critical aspects of behavior in local banking markets such as price and non-price competition, strategic interactions between small and large banks, de novo bank growth, and consumer switching. The results suggest that growing banks offer higher deposit interest rates than established banks. Established banks are more likely to engage in non-price competition, which can impede the effectiveness of de novo bank strategies and growth.