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Measuring banks’ market power in the presence of economies of scale: A scale-corrected Lerner index

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  • Spierdijka, Laura
  • Zaourasa, Michalis

Abstract

A positive Lerner index indicates a welfare loss for consumers due to deviations from marginal-cost pricing. Such a welfare loss may not always be due to market power, though. In particular, marginal-cost pricing would result in negative profit for the firm in the presence of economies of scale. In such a scenario, a positive Lerner index could simply reflect the firm’s need to earn non-negative profits rather than market power. We propose a novel, scale-corrected price-cost margin for firms that produce in the economies of scale range. We show that this measure is more informative about market power than the Lerner index itself. As an empirical illustration, we analyze market power in the U.S. banking sector using both the corrected and uncorrected Lerner index. The corrected Lerner index reveals significant market power for U.S. commercial banks during the 2000 – 2014 period.

Suggested Citation

  • Spierdijka, Laura & Zaourasa, Michalis, 2018. "Measuring banks’ market power in the presence of economies of scale: A scale-corrected Lerner index," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 40-48.
    • Handle: RePEc:eee:jbfina:v:87:y:2018:i:c:p:40-48
    DOI: 10.1016/j.jbankfin.2017.09.022
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    8. Molla Ramizur Rahman & Arun Kumar Misra, 2021. "Bank Competition Using Networks: A Study on an Emerging Economy," JRFM, MDPI, vol. 14(9), pages 1-18, August.
    9. Rakesh Arrawatia & Arun Misra & Varun Dawar & Debasish Maitra, 2019. "Bank Competition in India: Some New Evidence Using Risk-Adjusted Lerner Index Approach," Risks, MDPI, vol. 7(2), pages 1-12, April.
    10. Cai, Khoa & Le, Minh & Vo, Hong, 2019. "The cost of being safer in banking: Market power loss," Economic Analysis and Policy, Elsevier, vol. 62(C), pages 116-130.
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    More about this item

    Keywords

    Market power; Lerner index; Economies of scale; U.S. commercial banks;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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