Switching costs and market power in the banking industry: The case of cooperative banks

We investigate the influence of switching costs in banking for the three largest Eurozone countries (France, Germany, and Italy). We use Shy (2002) approach to measure switching costs on bank-level data from 2006 to 2012. We examine whether cooperative banks have different switching costs than commercial banks. We find lower switching costs for cooperative banks, suggesting that their client-based ownership contributes to reduce incentives to bank managers to lock in customers. We analyse whether the level of switching costs influences the market power of banks, and conclude to a positive relation between switching costs and market power.