Deposit Market Competition with Entry and Menu Choice

We study the determinants of the deposit market structure in the U.S. banking sector. Our structural model with three-stage empirical games incorporates the bank’s entry and menu choice decisions into the traditional deposit rate competition framework. The estimation focusing on the competition among the top 5 banks demonstrates that strategic interactions significantly influence entry decisions and deposit product menu compositions, impacting market shares and deposit rates. We simulate three counterfactual scenarios motivated by empirical observations after the financial crisis of 2008. The model-based prediction indicates that, excluding the menu composition channel, the conventional deposit competition model may have a misleading implication