Strategic Price Competition in Local Retail Deposit Markets : Impact of Branching, Wholesale Funds Access and Liquidity Demand

Studies often define competition in ways only estimable at an aggregate level, sometimes producing untenable interpretations. Our concept of oligopoly price competition facilitates estimation and interpretation at the firm-market level using available data. We combine a spatial-oligopoly market of local retail bank deposits with a national wholesale funds market, and a pricing strategy of predicting rival local-market demand. Price competition is the reaction of retail rates to predicted rival-wholesale rates at the bank-market level. Branching and wholesale funds access affect cross-sectional competition. Systemic liquidity affects intertemporal competition. The results have implications for antitrust, prudential and macro-financial policies