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Switching costs in the Swedish bankingsector
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.), Entrepreneurship and innovation.
2012 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

This paper elaborates on the topic of switching costs and investigates their influence on the Swedish market for loans. The Swedish banking sector is highly concentrated; customers are reluctant to alter banks. All together it raises the question of whether switching implies sufficiently high costs or not. The basis for the research is the model created by Kim (2003) who introduced transition probabilities incorporated into banks’ value maximization and applied them for the supply and demand functions. The empirical part of the paper is based on the data for 55 banks in total (commercial and saving, including the four major players) and analyzes whether high switching costs are the case for the market. The results of the research revealed that average switching costs on the market equal 0.148% which makes up only 2% of the average market interest rate and indicates low economic switching costs on the market on average. Therefore we may conclude that banking sector as a whole experiences merely psychological switching costs. However taking into account the existing bias in the sample towards the four main banks we eliminate them from the other observations by creating subsamples which are based on the number of branches. The results show significant switching costs for the banks with less than 100 branches: the value of costs is significantly higher in this case and equals 4.65% which makes up about 81% of the average interest rate in this subsample. Thus we may claim that small banks create the so called "lock-in" effect making it economically costly for the customers to alter bank.

Place, publisher, year, edition, pages
2012. , 57 p.
Keyword [en]
Banking, switching costs, Transition probability, Sweden, 2SLS
National Category
Economics and Business
URN: urn:nbn:se:kth:diva-155520OAI: diva2:761395
Available from: 2014-12-19 Created: 2014-11-06 Last updated: 2014-12-19Bibliographically approved

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