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Measuring and explaining competition in the financial sector

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Author Info

  • J.A. Bikker
  • Laura Spierdijk

Abstract

The first part of this paper provides a systematic discussion of the structural problems of competition on financial markets as observed from the demand and from the supply side, using a diagnostic framework. Potential impediments to competition are concentration, entry barriers, lack of transparency, product complexity, switching and search costs, financial illiteracy, lack of consumer power and weak intermediaries. In response to such financial market failures, we suggest a number of possible policy reactions. The second part of the paper investigates ways to measure competition and provides empirical figures on banking competition in 101 separate countries and assesses the market structure as monopolistic (or a perfect cartel), perfectly competitive or monopolistic competitive. Also, banking competition is explained, using explanatory variables of market structure, contestability, inter-industry competition, and institutional and macro economic conditions. This analysis provides possible instruments for reform in order to help promote competition. Next, the impact of banking consolidation is examined. Finally, developments in competition are observed over time, generally pointing to a downward trend.

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File URL: http://dspace.library.uu.nl/bitstream/handle/1874/36699/09-01.pdf
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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 09-01.

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Length: 35 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:use:tkiwps:0901

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Related research

Keywords: competition; concentration; entry barriers; transparency; restrictions on activities or investment; Panzar-Rosse model;

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References

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  1. Michiel van Leuvensteijn & J.A. Bikker & A.A.R.J.M. Rixtel & C. Kok-Sorensen, 2007. "A new approach to measuring competition in the loan markets of the Euro area," CPB Discussion Paper 84, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Michiel van Leuvensteijn & Christoffer Kok S�rensen & Jacob A. Bikker & Adrian A.R.J.M. van Rixtel, 2013. "Impact of bank competition on the interest rate pass-through in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(11), pages 1359-1380, April.
  3. Christos K. Staikouras & Anastasia Koutsomanoli-Fillipaki, 2006. "Competition and Concentration in the New European Banking Landscape," European Financial Management, European Financial Management Association, vol. 12(3), pages 443-482.
  4. J.A. Bikker & K. Haaf, 2000. "Competition, concentration and their relationship: an empirical analysis of the banking industry," Research Series Supervision (discontinued) 30, Netherlands Central Bank, Directorate Supervision.
  5. Sandra Braunstein & Carolyn Welch, 2002. "Financial literacy: an overview of practice, research, and policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 445-457.
  6. Jacob Bikker & Laura Spierdijk, 2008. "How Banking competition Changed over Time," DNB Working Papers 167, Netherlands Central Bank, Research Department.
  7. Angelini, Paolo & Cetorelli, Nicola, 2003. " The Effects of Regulatory Reform on Competition in the Banking Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 663-84, October.
  8. Jacob A. Bikker & Jaap W.B. Bos, 2005. "Trends in Competition and Profitability in the Banking Industry: A Basic Framework," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  9. Boone, Jan & van der Wiel, Henry & van Ours, Jan C, 2007. "How (not) to measure competition," CEPR Discussion Papers 6275, C.E.P.R. Discussion Papers.
  10. Juan Fernández De Guevara & Joaquín Maudos, 2007. "Explanatory Factors Of Market Power In The Banking System," Manchester School, University of Manchester, vol. 75(3), pages 275-296, 06.
  11. J.A. Bikker & J. Gorter, 2008. "Performance of the Dutch non-life insurance industry: competition, efficiency and focus," Working Papers 08-01, Utrecht School of Economics.
  12. Amparo Nagore & Joaquín Maudos Villarroya, 2005. "Explaining Market Power Differences In Banking: A Cross-Country Study," Working Papers. Serie EC 2005-10, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  13. B. Douglas Bernheim & Daniel M. Garrett, 1996. "The Determinants and Consequences of Financial Education in the Workplace: Evidence from a Survey of Households," Working Papers 96007, Stanford University, Department of Economics.
  14. Francisco Pérez García & Joaquín Maudos Villarroya & Juan Francisco Fernández de Guevara Radoselovics, 2003. "Integration And Competition In The European Financial Markets," Working Papers. Serie EC 2003-12, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  15. Hempell, Hannah S., 2002. "Testing for Competition Among German Banks," Discussion Paper Series 1: Economic Studies 2002,04, Deutsche Bundesbank, Research Centre.
  16. 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.
  17. J. A. Bikker & M. van Leuvensteijn, 2008. "Competition and efficiency in the Dutch life insurance industry," Applied Economics, Taylor & Francis Journals, vol. 40(16), pages 2063-2084.
  18. Bikker, Jacob A. & De Dreu, Jan, 2009. "Operating costs of pension funds: the impact of scale, governance, and plan design," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(01), pages 63-89, January.
  19. J.A. Bikker & K. Haaf, 2000. "Measures of competition and concentration in the banking industry: a review of the literature," Research Series Supervision (discontinued) 27, Netherlands Central Bank, Directorate Supervision.
  20. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  21. 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.
  22. 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.
  23. Jacob Bikker & Laura Spierdijk & Paul Finnie, 2006. "Misspecifiation of the Panzar-Rosse Model: Assessing Competition in the Banking Industry," DNB Working Papers 114, Netherlands Central Bank, Research Department.
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Cited by:
  1. Matousek, Roman & Nguyen, Thao Ngoc & Stewart, Chris, 2013. "Market structure in the banking sector: Evidence from a developing economy," Economics Discussion Papers 2013-1, School of Economics, Kingston University London.

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