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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 21, No. 4, pp.579-606
ISSN: 1225-0279 (Print)
Print publication date 30 Nov 2008
Received 16 Feb 2007 Revised 27 Oct 2008

Estimating Best Response Functions with Strategic Substitutability

Jabonn Kim
Research Fellow, Korea Institute of Finance, Banker's building, 4-1 Myoung- Dong 1-Ga, Chung-Ku, Seoul 100-021, Korea, Tel: +82-2-3705-6277 jbkim@kif.re.kr

JEL Classification: C30, D40, G21

Abstract

This paper is concerned with bank's strategic behaviors when substitutability between banking services is assumed. Best response functions and Nash equilibria may be better described by nonlinearity than by linearity. The nonlinearity is dependent on the nonlinearity of demand function, regardless of whether it is an individual or a market demand function. In the linear model, the dynamics and properties of a Nash equilibrium may be a priori, straight forward and trivial. However, nonlinearity contains the diverse possibility of dynamics, describing the game more realistically and carrying rich economic implications. Using nonlinear functions, our study investigates the game between banks with ATMs, telebanking and internet banking services, and discusses the existence of stable Nash equilibria and the possibility of collusion between players. It is also found that developing information technology accelerates the transformation of traditional banking services into electronic banking services.

Keywords:

Linearity, Nonlinearity, Best response function, Nash equilibrium, Cournot competition, Bertrand competition, Collusion

Acknowledgments

I am grateful to two anonymous referees for their valuable comments. I also have benefited from seminar participants at Seoul National University and Yonsei University.

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