Transcript EIS

Ch8 Banks and Money
指 導 老 師：李 永 銘
學
生：李 珮 鈺
楊 仁 宏
黃 昭 容
李 淑 君
日
期：2006.11.16
老師
9464505
9464518
9464521
9564505
Outline
 Switching Costs and Competition


A model of switching costs and fee competition
Empirical estimations of switching costs
 Automatic Teller Machines (ATMs)




A model of banks competition with ATMs
Incompatible ATMs
Compatible ATMs
One –way compatibility
 Media of Exchange as Network


Money and network effects
Coexistence of different payment instruments
A model of switching costs and fee
competition
Step1:
Let:
:the fee charged by bank i
:the cost of switching from bank i to a new account in a different bank
:the utility of a consumer served by bank i
Step2:
The profile of bank i ,as a function of fee charged and the number of accounts is:
A model of switching costs and fee
competition
Step3:
We index the banks so that 1 has the largest number of accounts, bank 2 has the
second-largest number of accounts, and so on
Step4:
A model of switching costs and fee
competition
Step5:
The fees
are observed, we can now solve for the unobserved switching costs of the
customers of each bank.
Step6:
The smallest bank assumes that it is targeted by bank 1, it maximizes
Step7:
Since
cost
and
are observed, we can solve for the unobserved remaining switching
Empirical estimations of switching costs
-In the market for demand deposits
The Finnish banking industry 1997.All figures are in $U.S.
Lifetime discounted sum of fees are based on a 4% real
interest rate.
Empirical estimations of switching costs
-In the market for demand deposits
•The large banks in general serve customers with high switching
cost.
•The smallest bank serves customer with no switching cost.
•Switching costs account for between 0% to 11% of average balance
a depositor maintains with the bank.
Empirical estimations of switching costs
-In the market for loans
•Switching costs decline with the size of the bank as
measured by the number of branches each bank
maintains .
Empirical estimations of switching costs
-Deposit accounts versus the market for loans
 Deposit-account market, switching costs tend to rise
with the size of the bank as measured by the
number of accounts.
 Market for loans, switching costs tend to decline
with the size of the bank as measured either by the
number of branches or the total loan size.
A model of banks competition with ATMs
Let:
:the fee charged to each bank i account holder
:the cost to a customer who switching from bank to another.
:the utility of a consumer served by bank i
:the number of ATMs of A bank
Incompatible ATMs
 Definition
Bank i is said to be undercutting the fee set by
bank j if bank i reduces its fee so that all the
customers of bank j switch to bank i .
Incompatible ATMs
Bank A sets the highest
subject to the constraint that
bank B will not find it profitable to undercut .Formally,
is determined by
Similarly,
is determined by
Incompatible ATMs
The equilibrium fee charged by each bank
Since each bank serves
given by
consumers, the profit levels are
Industry profit is given by
Incompatible ATMs
 Proposition 8.1
Each bank increases its fee when it increase the
number of installed ATMs relative to the competing
bank.
Compatible ATMs
All customers of all banks are served by all ATMs
All ATMs are available to all consumers regardless of which bank
maintains their account, undercutting is independent of the number of
ATMs installed by each bank
The aggregate industry profit equals to
One-way Compatible
Suppose now that bank A males its ATMs available to all customers
including the customers of bank B; however bank B installs incompatible
ATMs so that only the customers of bank B can access its ATMs.
Bank A attempts to undercut the fee set by bank B and attract B’s
customers it must set its undercutting fee to
Bank B attempts to undercut the fee set by bank A and attract B’s
customers it must set its undercutting fee to
One-way Compatible
The profit levels are
The industry profit under one-way compatibility is
Banks competition with ATMs
 Proposition 8.2
The profile level of a bank declines when it
makes its ATMs available for the customers of a
competing bank.
Media of Exchange as NetworksMoney and network effects
Proposition 8.3
Suppose that there is no money in this economy any
meeting between any two people will result in no trade.
A barter economy cannot achieve a Pareto-optimal
allocation
Pure exchange economy：the effect of fiat money
Media of Exchange as NetworksMoney and network effects
Proposition 8.4
An introduction of fiat money into an economy
supports trades that result in a Pareto-optimal
allocation.
$
Alice
Likes apples
Has bananas
bananas
apples
$
Benjamin
Likes bananas
Has carrots
Carrots
Charlie
Likes carrots
Has apples
Pure exchange economy：the effect of fiat money
$
Money and network effects
Proposition 8.5
It is sufficient that a relatively small number of individuals refuse
to trade with money for having all individuals in the economy refusing to
accept money in return for goods.
Proposition 8.6
even in states of public panic concerning the loss of value of the
currency, currency could still serve as the main medium of exchange as long
as governments accept tax payments and play
salaries using currency notes.
Media of Exchange as NetworksCoexistence of different payment instruments
 Two types of interacting agents：
(1)Buyers
(2)Merchants
 Three means of payment：
(1)electronic-cash cards
(2)currency notes and coins
(3)charge cards
Merchants’s Costs for each means of
payment
 Assumptions on the non-fee costs merchants must bear when
accepting each medium of payment
 Currency：
(1)Loss of time ΥM
(2)0≦λM≦1
(3)per-transaction cost of ΥM + λMP
 Electronic cash cards：no physical costs are associated with
electronic cash card transactions
 Charge cards：from a consumer is required to get an
authorization that verifies that the customers has a sufficient
credit to cover fro the purchase.Let φdenote the merchant’s
credit verification per-transaction cost.
Merchants’ ranking of payment
media
Buyers’ Costs for each means of
payment
 Currency：
(1)The value of lost time ΥB
(2)Loss of money with probability λB
(3)per-transaction cost of ΥB + λB P
 Electronic cash card
(1)Loss of the card with probability λB
(2)Loss of e-cash due to magnetic errors
resulting in a loss of reading capability ,
with probability of γB
(3)per-transaction cost of (λB +γB) P
 Charge cards：assume that charge cards do not impose any
physical costs
Buyers’ ranking of payment
media
Equilibrium usage of payment
media
Equilibrium determination of
payment media
 Proposition 8.7
1. Let ΥB /γB<(φ-ΥM)/M，three payment will coexist
2. Small transactions will be paid for with electronic cash cards
medium-sized transactions with currency notes and coins large
transaction with charge cards.
3. A reduction in the probability of magnetic errors, γB,in
electronic cash cards,or a reduction in merchants’ credit
verification cost, φ,can bring into the elimination of currency
as a means of payment.
As soon as confidence is built around these cards,buyers will
substitute electronic cash cards for notes and coins,which are
extremely hard to handle.
Q&A