Evolution in the Market Power of Financial Intermediation Services in Argentina: A Structural Empirical Analysis (2005:q1 - 2007:q1)

This paper examines the evolution of market power in Argentina’s financial intermediation industry during the relatively stable macroeconomic period from the first quarter of 2005 to the first quarter of 2007. Drawing on the New Empirical Industrial Organization and discrete-choice literature, it develops a structural model of differentiated banking products to estimate Lerner indices, since market shares alone may not adequately reflect market power when institutions offer heterogeneous services. The model separately estimates demand for financial investment services and loans using a multinomial logit specification, panel data, instrumental variables, and the generalized method of moments to address simultaneity and unobserved institutional characteristics. On the supply side, it models financial institutions’ profits and balance-sheet constraints, considering the opportunity cost of funds, commission income, linear costs, and Nash–Bertrand price competition. By combining the estimated demand elasticities with firms’ first-order pricing conditions, the study derives marginal costs and price-cost margins for each institution. The results provide evidence of market power, particularly in the loan market, where half of the institutions recorded margins above 15%. Nevertheless, competition appears to have increased over the period: average loan-market margins declined by approximately three percentage points, while margins on financial investment services also fell, although more moderately. These findings suggest that sustained growth and relative macroeconomic stability may foster greater competition in Argentina’s financial sector, highlighting financial stability as an important condition for its development.