Strategic Complementarities in Bank Branching Decisions

I study how complementarities between rival banks’ branching decisions impacted the effects of banking deregulation in the early 1990s. I use an instrumental variables approach to separately identify a bank’s strategic response to rivals’ branching decisions from common market factors. The results indicate that banks are generally more likely to open additional branches if their rivals open more branches, however the response differs by bank type. This has important implications for expansion and merger policies. These are explored using a model of consumer demand for bank services and bank branch network choices. I find that strategic complementarities in the branching decision augment the effects of a merger or expansion, leading many banking markets to become over-branched.