The main motivation for prudential regulation is to increase the solvency of the banking sector. However, it is usually understood that tighter regulation also leads to more concentration and higher spreads. Thus, these prudential measures are seen as implying a trade-off between solvency and competition. In this paper we argue that this trade-off does not necessarily exist. We present a model in which tighter capital requirements lead banks to choose a lower degree of product differentiation, potentially inducing more intense competition and lower spreads. The model is motivated by the recent evolution of the Argentine banking sector. q 2000 Elsevier Science B.V. All rights reserved.

A recent string of theoretical papers highlights the importance of geographical distance in explaining loan rates for small firms. Lenders located in the vicinity of small firms face significantly lower transportation and monitoring costs, and hence considerable market power, if competing financiers are located relatively far from the borrowing firms. We directly study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease in the distance between the firm and the lending bank and similarly increase in the distance between the firm and competing banks. The effect of distance on the loan rate is statistically significant and economically relevant, is robust to changes in model specifications and variable definitions, and is seemingly not driven by the modest changes over time in lending technology we infer. We deduce that transportation costs are causing the spatial price discrimination we observe. Keywords: spatial price discrimination, bank credit, lending relationships. JEL: G21, L11, L14.

We start the survey by reviewing the implications of horizontal and vertical product differentiation on market structure under the assumption of single-product firms. Then, we analyse the main results of the multi-product firm models, both when variants are assumed differentiated in vertical attributes only and when variants are assumed differentiated in two dimensions (vertical and horizontal). Finally, we review the empirical literature about discrete-choice models of product differentiation.

How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation í L H the choice of relationship based versus transactional banking í DQG EDQN LQGXVWU \ VSHFLDOL]DWLRQ:H empirically investigate the impact of interbank competition on bank branch orientation and specialization. We employ a unique data set containing detailed information on bank-firm relationships and industry classification. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending and specialize

How do banks react to increased interbank competition? Recent banking theory offers conflicting predictions about the impact of interbank competition on bank orientation - i.e., the choice of relationship based versus transactional banking - and bank industry specialization. We empirically investigate the impact of interbank competition on bank orientation and specialization. We employ a data set containing detailed information on bank-firm relationships and industry classification. We find that bank branches facing stiff local and multi-market competition engage relatively more frequently in relationship-based lending but specialize somewhat less in a particular industry. Keywords: bank orientation, bank industry specialization, competition, lending relationships. JEL: G21, L11, L14. I.

L’OCDE est un forum unique en son genre où les gouvernements de 30 démocraties œuvrent ensemble pour relever les défis économiques, sociaux et environnementaux que pose la mondialisation. L’OCDE est aussi à l'avant-garde des efforts entrepris pour comprendre les évolutions du monde actuel et les préoccupations qu’elles font naître. Elle aide les gouvernements à faire face à des situations nouvelles en examinant des thèmes tels que le gouvernement d’entreprise, l’économie de l’information et les défis posés par le vieillissement de la population. L’Organisation offre aux gouvernements un cadre leur permettant de comparer leurs expériences en matière de politiques, de chercher des réponses à des problèmes communs, d’identifier les bonnes pratiques et de travailler à la coordination des politiques nationales et internationales. Les pays membres de l’OCDE sont: l’Allemagne, l’Australie, l’Autriche, la Belgique,

We study an oligopoly model of banking that allows us to evaluate the two leading explanations for banks ’ ability to earn rents. In the model, banks can either invest in information acquisition, or in market power (through product differentiation). The two versions generate different predictions that are tested using panel data on Finnish local banks. We find that banks ’ investments in branch network density and human capital (personnel) contribute to the information acquisition ability of banks as both loan interest rates and default costs are decreasing in these variables. We also find that managing customers ’ money transactions enables banks to better control risks in their lending.

Whether or not banks are engaged in monitoring of customers (information acquisition) may have important consequences to the whole economy. Theory suggests an inverse relation between both average loan interest rates and credit losses, and banks ’ investments in monitoring. In contrast, investments in market power result in a direct relation. These predictions are tested using panel data on Finnish local banks. We find evidence that banks ’ investments in branch network density and human capital (personnel) contribute more to monitoring than to market power. We also find that managing the money transactions of customers enables banks to better control risks in their lending.

The views expressed here are those of the authors and do not necessarily reflect the views of the Bank of Finland.

Theoretical models of multidimensional product differentiation predict that in duopoly firms differentiate maximally along one dimension and minimally along the other dimensions. We experimentally reproduce a market in which firms can differentiate their products along two horizontal dimensions. The main result is that subjects do not differentiate their products and locate near the center consumers ’ distribution.