Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/53869 
Year of Publication: 
2008
Series/Report no.: 
Bank of Canada Working Paper No. 2008-32
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking (and electronic commerce more generally) reduces the cost of performing many types of transactions for firms. The full benefits for firms from adoption, however, only accrue once consumers begin to perform a significant share of their transactions online. Since there are learning costs to adopting the new technology firms may try to encourage consumers to go online by affecting the relative quality of the online and offline options. Their ability to do so is a function of market structure. In more competitive markets, reducing the relative attractiveness of the offline option involves the risk of losing customers (or potential customers) to competitors, whereas, this is less of a concern for a more dominant firm. We develop a model of branch-service quality choice with switching costs meant to characterize the trade-off banks face when rationalizing their network between technology penetration and business stealing. The model is solved numerically and we show that the incentive to lower branch-service quality and drive consumers into electronic banking is greater in more concentrated markets and for more dominant banks. We find support for the predictions of the model using a panel of household survey data on electronic payment usage as well as branch location data, which we use to construct measures of branch quality.
Subjects: 
Financial institutions
Market structure and pricing
JEL: 
D14
D4
G21
L1
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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