CONSUMER SWITCHING COSTS AND FIRM PRICING: EVIDENCE FROM BANK PRICING OF DEPOSIT ACCOUNTS

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We employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs. We argue that, because of the trade-off between attracting new customers and exploiting old ones, banks offer higher deposit rates in areas experiencing more in-migration. Further, because greater out-migration implies that a locked-in customer will not be with the bank for as many periods, banks will offer lower deposit rates in areas exhibiting greater out-migration. Also, because this effect of out-migration logically depends on the extent of in-migration, an interaction effect exists. We find evidence strongly supporting these relationships.