Consider a city with many banks. We model the market as having a monopolisticall

Question

Consider a city with many banks. We model the market as having a monopolistically
competitive market structure with horizontal product differentiation as in class.1
Suppose that each bank sells loan units (q) at price p where quantity units are in loans/
year and price units are in $/loan.

a) Explain ONE example of a way that banks could horizontally differentiate their bank
products and why this is an example of horizontal vs. vertical product differentiation.
b) Identify 3 fixed and 3 variable costs for bank loans.

Explanation / Answer

1.

In horizontal product differentiation goods are different but at the same price some consumers will buy one and some will buy other, it really depends on their preferences.

Horizontal differentiation: In each extreme of the city, there is a bank branch of two different bank. Although the two branch sell exactly the same product, consumers are not indifferent between them becuase of same price, they prefer to buy from the one that is closer.

Vertical Diffrentiation: Bank gives extra addons facility with the loan account like cheque book facility, ATM facility, No prepayment penalty.

2. Variable Cost: Number of bank employees will depend on number of bank loan,

Stationary work, or paper work will be required for each bank loan account

Customer service/ online bank account maintance charges

Fixed Cost: Infrastructure investment, Advertisement cost, Rent or fixed part of salaries

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