Article in a working paper series:

Helmuth Cremer, Philippe De Donder, Paul Dudley and Frank Rodriguez, "Competition Between Mail and Electronic Substitutes in the Financial Sector: A Hotelling Approach", IDEI Working Paper, n. 713, March 13, 2012.

Abstract

We build a model where two banks compete for the patronage of consumers by offering them, among other services and products, two forms of transactional media: paper statements and electronic substitutes. Both banks and both products are horizontally di¤erentiated and modeled à la Hotelling(1929). Assuming symmetry of consumer preferences (over banks and, independently, over the two transactional media) and of banks’s costs, we obtain that the unique pro…t-maximizing symmetrical prices re‡ect both the transactional media marginal costs and the intensity of competition between banks. Most notably, the intensity of consumers preferences for one variant of transactional medium over another has no in‡uence on the pro…t-maximizing media prices. Also, there is total pass-through of increases in input prices (such as mail price for paper statements) into prices paid by …nal consumers.