The effect of multimarket contacts on competition in Mexican banking

Traditional competition analysis typically relates the exercise of market power in an industry to structural characteristics of a market, such as concentration, barriers to entry, and factor and demand conditions. However, this analysis is incomplete if we do not consider the effects of contact among firms across markets. The objective of this paper is to empirically examine the effect of multimarket contact and of intensity of multimarket contact on bank competition in Mexico for the period of 2011 to 2023, using information at the bank and municipal market level. The Mexican case provides a valuable context for analyzing the relationship between market power and multimarket contacts, given the several regulatory reforms that have occurred in recent years and that have eliminated entry barriers to new competitors, as well as the trend toward consolidation of the banking sector. The main results suggest a positive relationship between market power and the quantity and intensity of multimarket contacts. In this context, the hypothesis of "mutual forbearance" in the Mexican banking sector could not be rejected. These findings have relevant implications for competition policy, suggesting that regulators should account multimarket contact structures when assessing competitive dynamics in the banking sector.