We estimate a perfect information static entry game to study the effect of cultural entry barriers on entry and competition in the retail banking industry. Canada provides a favorable setting for analysis due to its high linguistic diversity, concentrated market, and regulatory entry barriers. We find that cultural affinity between customers and financial institutions that share a common cultural origin plays an important role in explaining the comparative advantages of these institutions in certain markets. Using several counterfactual experiments and additional empirical evidence, we show that the effectiveness of regulations intended to foster competition is significantly limited by cultural barriers, which is a key determinant that shapes the competitive landscape of the industry.
Perez-Saiz, Hector, and Hongyu Xiao.
"Cultural Affinity, Regulation, and Market Structure: Evidence from the Canadian Retail Banking Industry."
American Economic Journal: Microeconomics,
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financial Institutions and Services: Government Policy and Regulation
Oligopoly and Other Imperfect Markets
Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification