Competition Between Mail and Electronic Substitutes in the Financial Sector: A Hotelling Approach

We build a model where two banks compete for the patronage of consumers by offering them, among other services and products, two forms of transactional media: paper statements and electronic substitutes. Both banks and both products are horizontally differentiated and modeled à la Hotelling (1929). Assuming symmetry of consumer preferences (over banks and, independently, over the two transactional media) and of banks's costs, we obtain that the unique profit-maximizing symmetrical prices reflect both the transactional media marginal costs and the intensity of competition between banks. Most notably, the intensity of consumers preferences for one variant of transactional medium over another has no influence on the profit-maximizing media prices. Also, there is total pass-through of increases in input prices (such as mail price for paper statements) into prices paid by final consumers.