A multiperiod model of competition in retail banking

This paper presents a two-period model of branching behaviour and competition in retail banking. It extends a static model, from which it borrows most of its theoretical underpinnings, by adding information on banks branching strategies under the (realistic) assumption that it takes time and strategic adjustments for a bank to reach its optimal branching network size. The estimated model yields measures of competition and measures of benefits and costs by bank and by market and their evolution in time. It results that between 2004 and 2006 in local Italian retail banking, competition and banks’ efficiency increased. There is evidence of crosstime subsidisations: banks may operate at suboptimal branching sizes, with benefits lower than costs, at some point in time, to reach “optimality” in the future.