Market power and merger simulation in retail banking
AbstractThis paper tests market power in the banking industry. Price-cost margins predicted by different oligopoly models are calculated using discrete-choice demand estimates of own-price and cross-price elasticities. These predicted price-cost margins are then compared with price-cost margins computed using observed interest rates and estimates of marginal costs. This paper is among the first to apply this methodology on a detailed, bank-level dataset from the retail banking sector. It extends on previous papers and illustrates the advantages of structural modelling by simulating a counterfactual merger experiment with a number of mergers, each of which involves two major banks, and studying the unilateral effect of the mergers on interest rates. This provides more evidence that concentration measures (such as the Herfindahl index) could be very misleading indicators of market power.
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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 4/2008.
Length: 26 pages
Date of creation: 27 Feb 2008
Date of revision:
demand; discrete choice; product differentiation; banking; market power; merger simulation;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-01 (All new papers)
- NEP-BAN-2008-03-01 (Banking)
- NEP-CMP-2008-03-01 (Computational Economics)
- NEP-COM-2008-03-01 (Industrial Competition)
- NEP-IND-2008-03-01 (Industrial Organization)
- NEP-MIC-2008-03-01 (Microeconomics)
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