Traditional banks, online banks, and number of branches

We develop a model of competition between a traditional bank offering its services through physical branches and an Internet bank offering its services exclusively online, and where the customers are heterogeneous in their location in the space as well as in the disutility they sustain when patronizing the Internet bank. We investigate the choice of the traditional bank about the number of branches it decides to operate through. We find the conditions under which the multi-branch model is the preferred option for the traditional bank, and those under which the single-branch model is preferred. We show that the choice of the traditional bank depends on both the characteristics of the demand side and the intensity of the transportation costs.