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Improving Market Power Tests: Does it matter for the Dutch Banking Market?

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  • J.W.B. Bos

Abstract

In this paper, I investigate whether improving the traditional SCP model gives additional insights in the existence of market power in the Dutch banking market. I first improve the measurement of market structure. Then, I introduce a simple Cournot-model, which results in a more flexible measure of market power for different market structures. Finally, I include the Efficiency hypothesis and modify it to more accurately test it jointly with the market power tests. Theoretically speaking, the Cournot model provides a better test for the existence of market power than the SCP model. Likewise, explicitly correcting for and including efficiency results in a more correct test of the Efficiency hypothesis. Empirical results confirm that the introduced improvements based on the Cournot models are the only ones resulting in tests that are consistent with the underlying models. Evidence from the Cournot model suggests that we cannot reject the existence of market power, although its impact on performance may be small. It also formalizes the need for additional research into the importance of strategic interaction among banks.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 56.

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Date of creation: Apr 2003
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Handle: RePEc:dnb:ressup:56

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Related research

Keywords: SCP hypothesis; efficiency hypothesis; cournot; x-efficiency;

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References

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  1. Joke Mooij & Henriette Prast, 2002. "A Brief History of the Institutional Design of Banking Supervision in the Netherlands," WO Research Memoranda (discontinued) 703, Netherlands Central Bank, Research Department.
  2. R. T.A. de Haas & I. P.P van Lelyveld, 2004. "Foreign Bank Penetration and Private Sector Credit in Central and Eastern Europe," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 3(2), pages 125-151, August.
  3. R.T.A. de Haas & T. Keijser, 2001. "Repo-style transactions and capital adequacy requirements Collateral, capital adequacy requirements, and supervisory policies," Research Series Supervision (discontinued) 37, Netherlands Central Bank, Directorate Supervision.
  4. Henriette Prast & Marc de Vor, 2001. "Investor reactions to news: an analysis of the euro-dollar exchange rate," MEB Series (discontinued) 2001-6, Netherlands Central Bank, Monetary and Economic Policy Department.
  5. J.A. Bikker & A.A.T. Wesseling, 2003. "Intermediation, integration and internationalisation: a survey on banking in Europe," Research Series Supervision (discontinued) 53, Netherlands Central Bank, Directorate Supervision.
  6. I.P.P. van Lelyveld & M.A. Donker, 2001. "Technology and the (Re)Location of Financial Activity a European Perspective," Research Series Supervision (discontinued) 42, Netherlands Central Bank, Directorate Supervision.
  7. Ralph de Haas, 2002. "Banken, instituties en zachte budgetbeperkingen tijdens de transitie," Finance 0209003, EconWPA.
  8. R.T.A. de Haas & I. van Lelyveld, 2002. "Foreign Bank Penetration and Bank Credit Stability in Central and Eastern Europe," Research Series Supervision (discontinued) 43, Netherlands Central Bank, Directorate Supervision.
  9. Klaas Knot, 2002. "Banking Supervision at the Crossroads: Background and Overview," Research Series Supervision (discontinued) 47, Netherlands Central Bank, Directorate Supervision.
  10. J.A. Bikker & I.P.P. van Lelyveld, 2002. "Economic versus Regulatory Capital for Financial Conglomerates," Research Series Supervision (discontinued) 45, Netherlands Central Bank, Directorate Supervision.
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Cited by:
  1. Pierre-Richard Agenor & Joshua Aizenman, 2008. "Capital Market Imperfections and the Theory of Optimum Currency Areas," NBER Working Papers 14088, National Bureau of Economic Research, Inc.
  2. Kostas Tsekouras & Irene Daskalopoulou, 2006. "Market Concentration and Multifaceted Productive Efficiency," Journal of Productivity Analysis, Springer, vol. 25(1), pages 79-91, 04.

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