possibility for banks of sharing Automatic Teller Machine (ATM) networks can be used as strategic variable to affect price competition on the deposit market and foreclose any potential entrant (Matutes and Padilla, 1994). A similar conclusion can be reached in frameworks where banks decide to offer remote access to their customers, such as postal or telephone services, in order to introduce vertical differentiation between banks and reduce the degree of horizontal differentiation (Degryse, 1996).
One important final note is that competition in networks can also be analyzed in two- sided markets. Rochet and Tirole (2002) analyze this issue in the context of credit card associations, where customers' banks and merchants have market power, and consumers and merchants decide rationally whether to buy or accept credit cards. As in the ATM literature, merchants can use card acceptance to increase customer base and relax price competition. Differently from the ATM literature, however, the system has to attract two sides of the market, i.e., issuers and acquirers, merchants and consumers. Thus, changes in interchange fees and prices affect the relative price structure of the two sides with important consequences on the equilibrium outcome.
In summary, competition in banking is imperfect and there are many frictions and barriers to entry which may generate rents.3 In retail banking switching costs for customers are very important; and reputation and branch networks act as entry barriers. In corporate banking established relationships and asymmetric information are relevant frictions that explain why the market for small and medium sized firms remains local. Electronic banking pushes in the direction of contestability, but it is also subject to exogenous and endogenous switching costs. In other segments of banking, like wholesale and investment banking, competition is at the international level and may be fierce.4
Degryse and Ongena (2008) provide evidence of those rents. See Vives (2001a,b).