Optimal Deposit Pricing in Competitive, Oligopolistic Markets

Abstract

We derive profit-optimal deposit rates in oligopolistic banking markets, considering the depositors' supply sensitivities to deposit rates, the competing banks' deposit rates and non-price factors. The resulting Nash equilibria agree with the empirical literature: Larger banks pay lower deposit rates, the more similar the banks are, the higher are the deposit rates. An increasing market concentration causes a decreasing average deposit rate, bounded from above and below by simple functions of two well-known measures of concentration. Extending our framework to a multi-period economy, relates the common banking approach to value deposits to the microeconomic approach used in industrial organization theory.