Rev Ind Organ (2008) 33:297–323
Search Cost and Price Dispersion in Vertically Related
Markets: The Case of Bank Loans and Deposits
Alfredo Martin-Oliver · Vicente Salas-Fumas ·
Published online: 23 November 2008
© Springer Science+Business Media, LLC. 2008
Abstract Using data on marginal interest rates of loan and deposit products by
Spanish banks, we ﬁnd that the level of interest rates on loans (deposits) across geo-
graphic markets decrease (increase) with the number of banks in each market, and that
the level of interest rates on loans increases with the level of interest rates of deposits.
We also ﬁnd that the dispersion of interest rates of both loans and deposits increase with
the number of banks. This evidence is interpreted as evidence of customer’s search
costs in retail banking, consistent with predictions from the Carlson and McAfee
(J Polit Econ 91:480–493, 1983) model of market competition with search costs.
Keywords Interest rate dispersion · Market structure · Search costs
JEL Classiﬁcations D83 · G21
The number of ﬁrms in a market is a key variable for competition analysis and policy.
The realistic observation that it is costly for buyers to discover the lowest selling price in
a market (search costs) widens the theoretical predictions on the relationship between
market structure and level and dispersion of equilibrium prices, complicating market
This paper is the sole responsibility of its authors, and the views represented here do not necessarily
reﬂect those of the Banco de España.
A. Martin-Oliver · J. Saurina (
Financial Stability Department, Banco de España, Alcalá, 48, 28014, Madrid, Spain
Facultad de CC Económicas, Universidad de Zaragoza, Gran Via 2, 50005, Zaragoza, Spain