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Market structure and quality: an application to the banking industry

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  • Astrid A. Dick

Abstract

This paper presents empirical evidence consistent with the predictions of the endogenous sunk cost model of Sutton (1991), with an application to banks. In particular, banking markets remain concentrated regardless of market size. Given an asymmetric oligopoly where dominant and fringe firms coexist, the number of dominant banks remains unchanged with market size, with only the number of fringe banks varying across markets. Such structure is sustained by competitive investments in quality, with the level of quality increasing with market size and dominant banks providing higher quality than fringe banks. The analysis has implications for antitrust policy.

Suggested Citation

  • Astrid A. Dick, 2003. "Market structure and quality: an application to the banking industry," Finance and Economics Discussion Series 2003-14, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2003-14
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    References listed on IDEAS

    as
    1. Astrid A. Dick, 2002. "Demand estimation and consumer welfare in the banking industry," Finance and Economics Discussion Series 2002-58, Board of Governors of the Federal Reserve System (U.S.).
    2. Lawrence J. Radecki & John Wenninger & Daniel Orlow, 1996. "Bank branches in supermarkets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 2(Dec).
    3. Christopher A. Williams, 1997. "Banks go shopping for customers," The Regional Economist, Federal Reserve Bank of St. Louis, issue Oct, pages 12-13.
    4. Shaked, Avner & Sutton, John, 1987. "Product Differentiation and Industrial Structure," Journal of Industrial Economics, Wiley Blackwell, vol. 36(2), pages 131-146, December.
    5. Ellickson, Paul, 2005. "Supermarkets as a Natural Oligopoly," Working Papers 05-04, Duke University, Department of Economics.
    6. Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
    7. Shaked, Avner & Sutton, John, 1983. "Natural Oligopolies," Econometrica, Econometric Society, vol. 51(5), pages 1469-1483, September.
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    Cited by:

    1. Goddard, John & Molyneux, Philip & Wilson, John O.S. & Tavakoli, Manouche, 2007. "European banking: An overview," Journal of Banking & Finance, Elsevier, vol. 31(7), pages 1911-1935, July.
    2. Ellickson, Paul B., 2006. "Quality competition in retailing: A structural analysis," International Journal of Industrial Organization, Elsevier, vol. 24(3), pages 521-540, May.
    3. Gehrig, Thomas & Stenbacka, Rune, 2007. "Information sharing and lending market competition with switching costs and poaching," European Economic Review, Elsevier, vol. 51(1), pages 77-99, January.

    More about this item

    Keywords

    Banking market ; Banking structure;

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