Bank competition with technological innovation based on evolutionary games

Abstract

We investigate the competition between banks according to an evolutionary model, in which the payoff gradient depends on a time-variant technological innovation factor. The explicit solutions of equilibrium strategies are derived via the method of characteristics. Advantageous technological innovation reduces costs and increases profits and credit supply. Better technology also induces the market’s herding behavior. Under the Bertrand competition, besides technological innovation, we consider the product substitutability and obtain the equilibrium price, which depends on a substitution parameter and the marginal cost. If there is moderate product differentiation, banks will not always reduce interest rates to seize market share.