PHONEBANKING

In a two-stage game, we study under what conditions banks offer phoneb anking (first stage). In the second stage, they are competitors in the market for deposits. Offering the phone option creates two opposing e ffects. The first is a demand effect as depositors strictly prefer to manage some of their financial transactions by phone. The second (stra tegic) effect is that competition is increased as transaction costs ar e lowered. Universal phonebanking prevails when the demand effect domi nates the strategic effect. Specialization can occur in that one bank offers the phone option while the other does not.