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CONSUMER SWITCHING COSTS AND FIRM PRICING: EVIDENCE FROM BANK PRICING OF DEPOSIT ACCOUNTS

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  • *The views expressed herein are those of the authors and do not necessarily reflect the views of the Board of Governors of the Federal Reserve System or its staff. The authors would like to thank Elizabeth Kiser, June K. Lee and Ron Borzekowski for helpful comments and Miranda Mei, Stephanie Ramirez and Jason Scott for excellent research assistance.

Abstract

We employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs. We argue that, because of the trade-off between attracting new customers and exploiting old ones, banks offer higher deposit rates in areas experiencing more in-migration. Further, because greater out-migration implies that a locked-in customer will not be with the bank for as many periods, banks will offer lower deposit rates in areas exhibiting greater out-migration. Also, because this effect of out-migration logically depends on the extent of in-migration, an interaction effect exists. We find evidence strongly supporting these relationships.

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