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Market Structure and the Diffusion of Electronic Banking ∗

By Jason Allen, Bank Of Canada, Robert Clark, Hec Montréal and Jean-françois Houde


This paper studies the role that market structure plays in affecting the diffusion of electronic banking. Electronic banking represents a process innovation since it reduces the cost of performing many types of transactions for banks. However, electronic banking (and electronic commerce more generally) is particular since the full benefits for firms from adoption only accrue once consumers begin to perform a significant share of their transactions online. Since it is costly for consumers to switch to the new technology (they must learn how to use it) banks 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 since 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 bank. Based on the Beggs and Klemperer (1992) model of price competition, 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 lowe

Year: 2008
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