Competition in local loan markets: An application of linear city-model with price discrimination

In this paper I analyze the local banking markets in the spatial competition context. In the model one bank is located at the one end of the unit long line and two rival banks are located at another end. Ends are considered as centers of two towns. Borrowers are located on the line between the centers. Analysis shows that price discrimination is dominating action for the bank with local monopoly and the cooperativeness of banks in oligopoly-town depends on discount rate of banks, market size development, and development of transportation costs. If banks in oligopoly-town act cooperatively and this town is bigger enough, the monopolistic bank gets lower interest returns than its rivals. If the noncooperative equilibrium realizes in the game in oligopoly-town, for given type of loans returns are always higher for the bank with local monopoly. – Banking ; Spatial competition ; Price discrimination ; local monopoly