Household Switching Behavior at Depository Institutions: Evidence from Survey Data

• Date: 01 December 2002
• Author: Elizabeth K. Kiser
• DOI: 10.1177/0003603X0204700404
• Published date: 01 December 2002
• Subject Matter: Economic

The Antitrust BulietinlWinter 2002

Household switching behavior at

depository institutions: evidence

from survey data

BY ELIZABETH K. KISER*

I.

Introduction

619

Because customer substitution across products and services influ-

ences market competition, an understanding of household rela-

tionships to

deposit

account

providers is important in guiding

bank merger policy. This study looks to new survey data to elicit

information on household switching behavior at depository insti-

tutions. While other surveys have investigated deposit relationship

durations, this survey is unique in that it asks deposit account

holders explicitly

about

specific reasons

for

changing banks or

remaining with a bank. The information reveals the relationship

dynamics between households and their depository institutions

and explores the importance of location, mobility, bank character-

istics and prices in deposit markets.

Anecdotal

evidence

indicates

that

for

some

banking

cus-

tomers, the act of establishing or closing adeposit account may

*Economist, Federal Reserve Board, Washington, DC.

AUTHOR'S

NOTE: Iwould like to thank Bob Adams, Dean Amel, Marianne

Bitler, Myron Kwast, Robin Prager, Steve Rhoades, and Paul Smith

for

helpful comments.

©2003 by Federal Legal Publications. Inc.

620

The antitrust bulletin

involve

spending

time

or

tying

up

needed

funds.

Economic

research suggests that such switching costs reduce consumer price

response and increase the cost

of

entry by firms by increasing the

change in prices or quality that

would

be necessary to induce a

customer

to

change

banks;'

The

empirical

literature

on

retail

deposits has shown deposit supply to be relatively price inelastic;

switching

costs

may

partly

explain

this

weak

price

response."

Another explanation for deposit supply inelasticity is the multi-

dimensional nature of deposit services.

If

customers have prefer-

ences for such characteristics as office locations or hours, then the

bundle

of

banking

services

constitutes

adifferentiated product,

relaxing the degree

of

direct price competition across firms." The

survey data provide considerable information on

both

customer

switching behavior and the degree

of

product differentiation for

retail deposit services at the household level.

The results show that median

deposit

tenure is 10 years, and

that the most frequently cited motivation for changing banks is a

household relocation. In addition, customer service

and

location

are the

most

frequently

reported

reasons

for

remaining

with

a

bank. The importance

of

relocation in

bank

switches corroborates

earlier studies that find greater competitive pressures on banks in

markets with high

population

turnover,

as

competition

may be

more intense for new customers moving into a market

who

do not

See P. Klernperer, Competition when Consumers Have Switching

Costs: An

Overview

with

Applications

to

Industrial

Organization,

Macroeconomics,

and

International Trade, 62

REV.

ECON.

STUD.

515

(Oct. 1995), as well as M. Zephirin, Switching Costs in the Deposit Mar-

ket, 104

ECON.

J. 455 (March 1994); S. Sharpe, The Effect

of

Consumer

Switching Costs on Prices: ATheory

and

Its Application to the Bank

Deposit Market, 12

REV.

INDUS.

ORG.

79 (Feb. 1997); and M.

KIM

ET

AL.,

ESTIMATING

SWITCHING

COSTS

AND

OLIGOPOLISTIC

BEHAVIOR

(Working

Paper, U. of Haifa and Norges Bank (2001».

2See D. Arnel &T. Hannan, Establishing Banking Market Defini-

tions Through Estimation

of

Residual Deposit Supply Equations, 23 J.

BANKING

&

FIN.

1667 (Nov. 1999).

See B. Eaton &R. Lipsey, Product Differentiation, in 1

HANDBOOK

OF

INDUSTRIAL

ORGANIZATION

725 (R.

Schrnalensee

&R.

Willig,

eds.,

1996).