Strategic Behavior between a Bank and a Microfinance Institution: The Role of Psychological Distance and Education Level

François Fall (1) , Thanh Tam Nguyen-Huu (2)

1 LEREPS - Laboratoire d'Etude et de Recherche sur l'Economie, les Politiques et les Systèmes Sociaux
2 CREAM - Centre de Recherche en Economie Appliquée à la Mondialisation

In Hotelling’s fundamental model (1929), the geographical distance and high transportation costs grant firms present in a market a certain power over local buyers in their neighborhoods. Starting from his model, this study shows that in the competition between a bank and a microfinance institution (MFI), geographical distance and transportation costs alone are no longer sufficient for attributing market power to the firms present. In fact, the introduction of psychological distance and education level in the model alter the Hotelling’s results. Psychological proximity (trust) and the educational level of the client play determinant roles in dividing the credit market between a bank and an MFI.

Keywords: microfinance; market power; market power Authors; spatial competition; bank

Domains: Quantitative Finance [q-fin]; Mathematics [math]

François Fall, Thanh Tam Nguyen-Huu. Strategic Behavior between a Bank and a Microfinance Institution: The Role of Psychological Distance and Education Level. 2015. ⟨hal-01566392⟩