When For-Profits and Not-For-Profits Compete: Theory and Empirical Evidence from Retail Banking

This study models competition in local deposit markets between for-profit and not-for-profit financial institutions. For-profit re tail banks may of fer a superior bundle of financial services, but not-for-profit (occupational) credit unions enjoy subsidies from their sponsors (and exemption from federal in come taxes), which allow them to capture a share of the local market. The model predicts that, at the county level, greater participation in credit unions is associated with higher levels of retail-banking concentration. This hypothesis is supported by empirical evidence for the period 1990-2000, but not for the most re cent past (2001-2002). The ability of credit unions to affect local banking market structure sup ports the presumption of cur rent banking anti trust analysis that re tail banking markets are local. Further, this study provides an empirical analysis of how local economic conditions-in come per capita and population density-affect competition between banks and credit unions.