Advanced Search
MyIDEAS: Login

Misspecifiation of the Panzar-Rosse Model: Assessing Competition in the Banking Industry

Contents:

Author Info

  • Jacob Bikker
  • Laura Spierdijk
  • Paul Finnie

Abstract

This paper demonstrates that the level of competition in the existing Panzar Rosse (P-R) literature is systematically overestimated and that the tests on both monopoly and perfect competition are distorted. This is due to the use of bank revenues divided by total assets as dependent variable in the P-R model instead of unscaled bank revenues. We provide both theoretical and empirical evidence to illustrate the impact of the misspecification on the estimation of competition and the statistical tests on the market structure. Inclusion of scale variables as explanatory variables, which is commonpractice in the current literature, has a similar distorting effect. Our overview of the extensive P-R literature reveals that all 28 studies considered suffer from these types of misspecification. The empirical evidence provided in this paper is based on a large sample of more than 18,000 banks in 101 countries over 16 years. We find that monopoly cannot be rejected in 28% of the countries (against 0% under misspecification) and that perfect competition cannot be rejected in 38% of the cases (against 20-30% under misspecification).

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.dnb.nl/binaries/Working%20Paper%20114-2006_tcm46-146771.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 114.

as in new window
Length:
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:dnb:dnbwpp:114

Contact details of provider:
Postal: Postbus 98, 1000 AB Amsterdam
Web page: http://www.dnb.nl/en/
More information through EDIRC

Related research

Keywords: competition; banking industry; Panzar-Rosse model; misspecification; market structure;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Molyneux, Phil & Lloyd-Williams, D. M. & Thornton, John, 1994. "Competitive conditions in european banking," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 445-459, May.
  2. Yildirim, H. Semih & Philippatos, George C., 2007. "Restructuring, consolidation and competition in Latin American banking markets," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 629-639, March.
  3. Claessens, Stijn & Laeven, Luc, 2004. "What Drives Bank Competition? Some International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 563-83, June.
  4. Hempell, Hannah S., 2002. "Testing for Competition Among German Banks," Discussion Paper Series 1: Economic Studies 2002,04, Deutsche Bundesbank, Research Centre.
  5. Kishan, Ruby P & Opiela, Timothy P, 2000. "Bank Size, Bank Capital, and the Bank Lending Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(1), pages 121-41, February.
  6. Jacob Bikker & Jaap Bos, 2004. "Trends in Competition and Profitability in the Banking Industry: A Basic Framework," DNB Working Papers 018, Netherlands Central Bank, Research Department.
  7. Cowling, Keith, 1976. "On the theoretical specification of industrial structure-performance relationships," European Economic Review, Elsevier, vol. 8(1), pages 1-14, June.
  8. Hondroyiannis, George & Lolos, Sarantis & Papapetrou, Evangelia, 1999. "Assessing competitive conditions in the Greek banking system," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(4), pages 377-391, November.
  9. Armenuhi Mkrtchyan, 2005. "The evolution of competition in banking in a transition economy: an application of the Panzar-Rosse model to Armenia," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(1), pages 67-82, June.
  10. Al-Muharrami, Saeed & Matthews, Kent & Khabari, Yusuf, 2006. "Market structure and competitive conditions in the Arab GCC banking system," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3487-3501, December.
  11. Molyneux, Philip & Thornton, John & Michael Llyod-Williams, D., 1996. "Competition and market contestability in Japanese commercial banking," Journal of Economics and Business, Elsevier, vol. 48(1), pages 33-45, February.
  12. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  13. Alli Nathan & Edwin H. Neave, 1989. "Competition and Contestability in Canada's Financial System: Empirical Results," Canadian Journal of Economics, Canadian Economics Association, vol. 22(3), pages 576-94, August.
  14. Barbara Casu & Claudia Girardone, 2006. "Bank Competition, Concentration And Efficiency In The Single European Market," Manchester School, University of Manchester, vol. 74(4), pages 441-468, 07.
  15. Burak Gunalp & Tuncay Celik, 2006. "Competition in the Turkish banking industry," Applied Economics, Taylor and Francis Journals, vol. 38(11), pages 1335-1342.
  16. Mamatzakis, E. & Staikouras, C. & Koutsomanoli-Fillipaki, N., 2005. "Competition and concentration in the banking sector of the South Eastern European region," Emerging Markets Review, Elsevier, vol. 6(2), pages 192-209, June.
  17. Sherrill Shaffer, 2002. "Conduct in a Banking Monopoly," Review of Industrial Organization, Springer, vol. 20(3), pages 221-238, May.
  18. De Bandt, Olivier & Davis, E. Philip, 2000. "Competition, contestability and market structure in European banking sectors on the eve of EMU," Journal of Banking & Finance, Elsevier, vol. 24(6), pages 1045-1066, June.
  19. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  20. Cowling, Keith & Waterson, Michael, 1976. "Price-Cost Margins and Market Structure," Economica, London School of Economics and Political Science, vol. 43(171), pages 267-74, August.
  21. J.A. Bikker & J.M. Groeneveld, 1998. "Competition and Concentration in the EU Banking Industry," Research Series Supervision (discontinued) 8, Netherlands Central Bank, Directorate Supervision.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Michiel van Leuvensteijn & Christoffer Kok Sørensen & Jacob A. Bikker & Adrian van Rixtel, 2008. "Impact of bank competition on the interest rate pass-through in the euro area," Banco de España Working Papers 0828, Banco de España.
  2. Jason Allen & Darcey McVanel, 2009. "Price Movements in the Canadian Residential Mortgage Market," Working Papers 09-13, Bank of Canada.
  3. Jacob A. Bikker & Laura Spierdijk & Paul Finnie, 2006. "The Impact of Bank Size on Market Power," DNB Working Papers 120, Netherlands Central Bank, Research Department.
  4. Jacob Bikker & Laura Spierdijk, 2008. "How Banking competition Changed over Time," DNB Working Papers 167, Netherlands Central Bank, Research Department.
  5. Daley, Jenifer & Matthews, Kent, 2009. "Out of many, dominance by a few? Market power in the Jamaican banking sector," Cardiff Economics Working Papers E2009/28, Cardiff University, Cardiff Business School, Economics Section.
  6. Paolo Coccorese, 2010. "Information Exchange as a Means of Collusion: The Case of the Italian Car Insurance Market," Journal of Industry, Competition and Trade, Springer, vol. 10(1), pages 55-70, March.
  7. Jacob A. Bikker & Laura Spierdijk, 2009. "Measuring and explaining competition in the financial sector," Working Papers 09-01, Utrecht School of Economics.
  8. Sami Mensi, 2010. "Measurement of Competitiveness Degree in Tunisian Deposit Banks: An Application of the Panzar and Rosse Model," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 189-207, June.
  9. Mamonov, Mikhail, 2010. "Testing for Competition in the Russian Banking Sector within Panzar-Rosse approach: theoretical and empirical framework," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 20(4), pages 3-27.
  10. John Goddard & John O.S. Wilson, 2008. "Measuring Competition in Banking : A Disequilibrium Approach," EIEF Working Papers Series 0808, Einaudi Institute for Economic and Finance (EIEF), revised Apr 2008.
  11. Xiaoqiang Cheng & Patrick VAN CAYSEELE, 2010. "State Aid and Competition in Banking: The Case of China in the Late Nineties," Working Papers id:2435, eSocialSciences.
  12. Miguel Boucinha & Nuno Ribeiro, 2007. "An Assessment of Competition in the Portuguese Banking System in the 1991-2004 Period," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dnb:dnbwpp:114

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rob Vet).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.