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Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement

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Abstract

The antitrust intervention in banking has always been heavily influenced by considerations of stability. Regulation has historically given precedence to the stability objective, relegating thus competition to second place. In fact, in the case of banking, price competition tends to encourage overly speculative behaviours, which essentially entail acceptance of excessive risk, with a resultant volatility that could potentially harm depositors, and ultimately compromise the stability of the economic system as a whole. The consequence of this approach is that banking market becomes extremely rigid on the supply side and structurally not equipped for a competitive orientation, and banks come to occupy a privileged position vis-à-vis governments that--to a greater or lesser extent, depending on the countries and the situations--enables them to sidestep the antitrust authorities. In such a scenario, the trade-off between stability and competition cannot be totally resolved through traditional antitrust actions, which are sometimes at odds with the stability objective and hampered by the constraints of the previously defined regulatory framework. It is precisely these considerations, found in a significant portion of the literature, that provide the starting base for the hypothesis of this work and namely the proposal of a novel demand side perspective, i.e. one which focuses on the central role of consumers in the competitive process. If intervention on the supply side is hampered a priori by the regulatory framework, it is nevertheless possible to implement pro-competition actions on the demand side, for example by enhancing the ability of consumers to change from one provider to the other without impacting on the market structure. In operational terms, the proposed approach is to leverage consumer mobility in order to stimulate the currently weakened competition between firms. This would make it possible to pursue the traditional antitrust objectives of efficiency and welfare maximisation, without necessarily impacting on stability.

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Bibliographic Info

Paper provided by Cattaneo University (LIUC) in its series LIUC Papers in Economics with number 153.

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Length: 26 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:liu:liucec:153

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  1. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-80, June.
  2. Elizabeth Kiser, 2002. "Predicting Household Switching Behavior and Switching Costs at Depository Institutions," Review of Industrial Organization, Springer, vol. 20(4), pages 349-365, June.
  3. Waterson, Michael, 2003. "Consumers and Competition," The Warwick Economics Research Paper Series (TWERPS) 679, University of Warwick, Department of Economics.
  4. Philipp Hartmann & Elena Carletti, 2002. "Competition and Stability: What's Special about Banking?," FMG Special Papers sp140, Financial Markets Group.
  5. S. Mishkin, Frederic, 1999. "Financial consolidation: Dangers and opportunities," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 675-691, February.
  6. Kim, Moshe & Kliger, Doron & Vale, Bent, 2003. "Estimating switching costs: the case of banking," Journal of Financial Intermediation, Elsevier, vol. 12(1), pages 25-56, January.
  7. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  8. Panzar, John C & Willig, Robert D, 1981. "Economies of Scope," American Economic Review, American Economic Association, vol. 71(2), pages 268-72, May.
  9. Giovanni B. Ramello, 2002. "Copyright and Antitrust Issues," LIUC Papers in Economics 114, Cattaneo University (LIUC).
  10. Marcel Canoy & Machiel van Dijk & Jan Lemmen & Ruud de Mooij & Jürgen Weigand, 2001. "Competition and stability in banking," CPB Document 15, CPB Netherlands Bureau for Economic Policy Analysis.
  11. Shy, Oz, 2002. "A quick-and-easy method for estimating switching costs," International Journal of Industrial Organization, Elsevier, vol. 20(1), pages 71-87, January.
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Cited by:
  1. Donatella Porrini & Giovanni B. Ramello, 2011. "Class action and financial markets: insights from law and economics," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(2), pages 140-160, July.

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