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Testing for imperfect competition on EU deposit and loan markets with Bresnahan's market power model

Bresnahan and Lau developed a model of profit maximising oligopoly banks in order to determine the degree of market power of the average bank. The equilibrium price equation includes a mark up, which is not used at all under perfect competition, partly used under oligopoly or monopolistic competition and fully used under monopoly. The data requirements of the model allow testing of possible use of market power for submarkets. This article investigates the degree of competition on both the deposit and loan markets in nine EU countries, both apart and jointly. The hypothesis of perfect competition can be rejected for the deposit market of the 'entire' EU, for the deposit markets of Germany and Spain and for the lending markets of Germany, Portugal, Spain, Sweden and the UK. Nevertheless, these markets are characterised as highly competitive, because the use or abuse of market power is very limited.

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Paper provided by Netherlands Central Bank, Directorate Supervision in its series Research Series Supervision (discontinued) with number 52.

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Date of creation: Feb 2003
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Handle: RePEc:dnb:ressup:52
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  1. David Genesove & Wallace P. Mullin, 1998. "Testing Static Oligopoly Models: Conduct and Cost in the Sugar Industry, 1890-1914," RAND Journal of Economics, The RAND Corporation, vol. 29(2), pages 355-377, Summer.
  2. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, June.
  3. Graddy, K., 1993. "Testing for Imperfect Competition at the Fulton Fish Market," Papers 137, Princeton, Department of Economics - Financial Research Center.
  4. Lau, Lawrence J., 1982. "On identifying the degree of competitiveness from industry price and output data," Economics Letters, Elsevier, vol. 10(1-2), pages 93-99.
  5. Bresnahan, Timothy F., 1982. "The oligopoly solution concept is identified," Economics Letters, Elsevier, vol. 10(1-2), pages 87-92.
  6. John C. Hause, 1977. "The Measurement of Concentrated Industrial Structure and the Size Distribution of Firms," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 73-107 National Bureau of Economic Research, Inc.
  7. Salvanes, K.G. & Steen, F., 1995. "Testing for Market Power Using a Dynamic OLigopoly Model," Papers 13/95, Norwegian School of Economics and Business Administration-.
  8. Toolsema, Linda A., 2002. "Competition in the Dutch consumer credit market," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2215-2229, November.
  9. 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.
  10. Shaffer, Sherrill, 1993. "A Test of Competition in Canadian Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(1), pages 49-61, February.
  11. 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.
  12. Shaffer, Sherrill, 1989. "Competition in the U.S. banking industry," Economics Letters, Elsevier, vol. 29(4), pages 321-323.
  13. Ribon, S. & Yosha, O., 1999. "Financial Liberalization and Competition in Banking: an Empirical Investigation," Papers 23-99, Tel Aviv.
  14. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
  15. Iwata, Gyoichi, 1974. "Measurement of Conjectural Variations in Oligopoly," Econometrica, Econometric Society, vol. 42(5), pages 947-66, September.
  16. Suominen, Matti, 1994. " Measuring Competition in Banking: A Two-Product Model," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(1), pages 95-110.
  17. J.A. Bikker & K. Haaf, 2001. "Competition, Concentration and their Relationship: an EmpiricalAnalysis of the Banking Industry," DNB Staff Reports (discontinued) 68, Netherlands Central Bank.
  18. Alexander, Donald L., 1988. "The oligopoly solution tested," Economics Letters, Elsevier, vol. 28(4), pages 361-364.
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