Estimating Best Response Functions with Strategic Substitutability

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.