Entry in Independent Submarkets: An Application to the Spanish Retail Banking Market

Abstract: This paper is aimed at the analysis of the banks ’ decisions to open branches in submarkets and, in particular, to test if these decisions can be considered mainly determined by what is happening in each submarket, irrespective of what has happened in other submarkets, as Sutton’s indepen-dent submarkets model suggests. With data on the Spanish retail banking sector for the period 1994-98, I specify and estimate a discrete choice model to examine the entry probability of potential new entrants into submarkets. I find that the entry decisions of potential entrants are mainly determined by submarket characteristics, as opposed to entity-specific characteristics. This result is consistent with the assumptions of the theoretical model.