Competition and R&D in retail banking under expense preference behaviour

Abstract

Cost-reducing R&D activities are examined in the context of a retail banking sector where some entities exhibit an expense preference. The results reveal that the effects from R&D interact with the effects in the previous literature in shaping the equilibrium configuration.

Acknowledgements

We thank Santiago Carbó and M. Paz Coscollá for useful discussions on related work. The usual disclaimer applies.

Notes

¹ Shaffer (2002) documents the presence of some linkages between ownership structure and market conduct among Swiss banks. For empirical evidence on expense preference in banking, see Gropper and Oswald (1996), Izawa and Tsutsui (1998), Mixon and Upadhyaya (2001), and the references therein.

² On strategic R&D investments, see d’Aspremont and Jaquemin (1998), and Beath et al. (1995) among others. See also Jones and Danbolt (2003) for an analysis of the linkages between R&D announcements and ownership structure. The setting builds on the deposit-based framework by Purroy and Salas (2000), and it may be extended to a loan-based setting along the lines of Berenguer et al. (2003) without altering the qualitative results.

³ This leads to a production cost structure as in d’Aspremont and Jacquemin (1988) without spillovers (e.g., see Poyago-Theotoky, 1996, and Fauli and Pastor, 2002). Introducing spillovers yields intermediate forms of R&D configurations such as research joint ventures whose analysis is of independent interest.

⁴ It can be shown that , , and for i = 1, 2.

⁵ For θ _x to be positive in Result 1 it is required that 4α > r, which is not prevented by our assumptions, particularly r > (1 + 3θ)α, since θ < 1.

⁶ Given that the influence of the savings bank's R&D on the volume of deposits falls as θ increases, the timing effect with the savings bank as a leader (i.e., first mover) is decreasing in the expense preference parameter. In contrast, the timing effect with the commercial bank as a leader is independent of θ. On these features, see Equations 4.1 and 4.2

⁷ Results 1 and 2, with θ _x ≤ θ _D as γ ≤ γ *, and θ _x > θ _D as γ > γ *, where γ * ≡ (r(r − α) + 2α²)/(9α²), lead to Fig. 1.