An Analysis of the Price-Concentration Relationship in the Botswana Commercial Banking Industry

There are two different schools of thought on the relationship between pricing and measures of market structure such as concentration and market share in the banking industry. The structure-conduct-performance (market power) school suggests that concentration is empirically evident via the setting of prices which are less favorable to consumers (higher-borrowing rates and lower-deposit rates). Here conduct is structure driven and leads to further increases in welfare reducing concentration. The other school of thought - efficient-structure-suggests that due to X-efficiency some firms derive their higher profits by keeping costs lower via better management or production technologies. The other idea of the efficient-structure school is that though firms may have similar management and technology, some firms are capable of producing at more efficient scales than others and therefore also have lower unit costs and higher unit profits. This papers adds to the debate by using data on the banking industry in Botswana to examine the above theories. Preliminary findings support the structure-conduct hypothesis.