Does the Internet replace brick-and-mortar bank brances?


This paper examines the impact of the internet on brick-and-mortar bank branches using a two-stage model with a static oligopoly model for deposits and a dynamic discrete game for branch openings and closures. We first develop a nested logit model for deposits where consumers choose a bank to make a deposit considering the high-speed internet available in the market and the substitution between bank branches and the internet. In the first-stage dynamic bank branch opening-closure game, banks receive a chance to open or close a branch sequentially in continuous time. Upon receiving a move opportunity, banks decide to open or close a branch based on their expectations on changes in variable profits and their opponents’ moves. The results imply that the internet decreases each bank’s variable profits from branches, hence induces bank branch closures. Moreover, counterfactual results show that when markets have more internet connections available, consumers in small markets experience welfare gain whereas those in larger markets are more likely to lose consumer surplus from making deposits.

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