Price Regulation and Quality Rivalry In a Profit-Maximizing Model: The Case of Bank Branching

Abstract

Since the 1930s commercial banks have been under the Federal Reserve's Regulation Q with respect to the price they can pay to attract deposits. More recently, savings and loan associations (S&L's) and mutual savings banks (MSB's) have been subject to similar price regulation. Facing this kind of price regulation, firms are likely to turn to nonprice or quality variables on which they can compete for business (see [12, 19, 20] ). Indeed, casual observation indicates that banks and other financial institutions in some markets have engaged in a good deal of nonprice competition or rivalry. This takes the form of free gifts for new deposits, longer banking hours for depositing or withdrawing money, and other extra conveniences.l Unfortunately, the absence of speciflc data on these kinds of services and expenditures forecloses a rigorous test of whether the provisions of these extra features and services are a response to competitive pressures, i.e., whether market structure influences the quality level.2 There is one type of quality variable, however, for which good data are available: the extent of branch banking. Increased numbers of banking offices are likely to

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