Competition, Product Differentiation and Quality Provision: An Empirical Equilibrium Analysis of Bank Branching Decisions

We analyze the effects of market structure on the branching decisions of three types of depository institution: multimarket banks, singlemarket banks, and thrift institutions. We argue that additional branches increase quality for an institution’s consumers, and examine the interaction between market structure and this particular measure of quality. We account for endogenous market structure using an equilibrium structural model, which corrects for bias caused by correlation in the unobservables that may drive entry and branching activity. We estimate the model using data from over 1,750 concentrated rural markets. Our results demonstrate the importance of product differentiation, as competition from multimarket banks is associated with denser branch networks for all types of firm while the opposite correlation holds when competitors are single-market banks or thrifts. JEL classification: L11, L13, G21, G28 *The views expressed in this paper are those of the authors and do not necessarily reflect the view of the Board of Governors or its staff. We thank Dean Amel, Leemore Dafny, Shane Greenstein, Tim Hannan, Robin Prager and participants at the 2004 IOS conference for helpful comments. All errors are the responsibility of the authors.