A conjectural variation approach for assessment of competition: a case on Indian commercial banks

Purpose - During the last two decades there have been significant policy changes in the banking system, primarily in the emerging market economies. These changes have impacted the competitive structure of banking. In India, since 1991, gradual reform measures have been initiated to improve efficiency, productivity, competition and stability of the banking sector. There is a requirement for a formal approach to examine level of competition in Indian banking sector after the liberalization. This paper aims to address this issue. Design/methodology/approach - The article applied the conjectural variation method using 2‐stage least square for assessing the degree of competition in the Indian banking system. Findings - The paper finds that competitive condition in the Indian banking sector has been improving 1996. However, big banks with market share more than 1 per cent have been exercising some degree of price mark‐up over their marginal cost. Research limitations/implications - Due to the paucity of data competition at the regional level is not analysed which is a limitation of the article. Practical implications - Analysis of competition allows the policy formulators to design proper liberalization measures to ensure greater competition in the banking sector so as to prevent any cartel formation. Social implications - Since the Indian banking sector is monopolistically competitive, the article advocates for more liberalization measures to improve competition in the Indian banking sector. Originality/value - To assess competition the article has covered 53 banks involving more than 90 per cent banking sector assets of the country. Through Lerner Index the article has found that big banks are able to charge a price which is about 30 per cent more than their marginal cost. The conjectural variation method is a monopolistic market structure prevailing in the Indian banking sector.