Estimating Best Response Functions with Strategic Substitutability

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.