Monday, June 18, 2012
Posted by D. Daniel Sokol
Helmuth Cremer (Toulouse School of Economics (GREMAQ, IDEI and Institut universitaire de France)) Philippe De Donder (Toulouse School of Economics (GREMAQ-CNRS and IDEI)), Paul Dudley (Head of Regulatory Economics, Royal Mail Group) and Frank Rodriguez (Associate, Oxera) explore Competition Between Mail and Electronic Substitutes in the Financial Sector: A Hotelling Approach.
ABSTRACT: We build a model where two banks compete for the patronage of consumers by offering them, among other services and products, two forms of transactional media: paper statements and electronic substitutes. Both banks and both products are horizontally differentiated and modeled a la Hotelling(1929). Assuming symmetry of consumer preferences (over banks and, independently, over the two transactional media) and of bankss costs, we obtain that the unique profit-maximizing symmetrical prices reect both the transactional media marginal costs and the intensity of competition between banks. Most notably, the intensity of consumers preferences for one variant of transactional medium over another has no inuence on the profit-maximizing media prices. Also, there is total pass-through of increases in input prices (such as mail price for paper statements) into prices paid by final consumers.