Abstract:

Based on a combination of the lending model and the Hotelling model, this paper makes an analysis of the two essential features of a credit market that have effects on competitions between commercial banks. First, customers have their different preferences to a bank location. Secondly, the severity of asymmetric information between banks and customers makes banks face more uncertainty. To reduce this uncertainty, the bank uses credit-worthiness tests so as to get information about its customers. Meanwhile, to make sure the quality of a credit-worthiness test, the bank has to bear investments in information acquisition. The equilibrium outcome shows that the bank may choose a maximal differentiation stragegy if it is sufficiently pessimistic about the credit-worthiness of its customers and its ability of information acquisition is limited.

Key words: commercial bank, competition, asymmetric information, maximal differentiation strategy