Multimarket Competition and Profitability: Evidence from Ukrainian banking

This paper examines the impact of non-price competition, indicated by multimarket contacts, on bank performance. Using a unique data set of Ukrainian banks’ branch locations, we construct three measures of multimarket linkages. We find that banks with a higher level of multimarket contacts are more likely to have higher financial performance. The findings support the mutual forbearance hypothesis: when banks compete in multiple markets, they have incentives to cooperate instead of competing aggressively. This cooperative incentive is induced by the familiarity and the similarity among multimarket competitors. The positive effect of multimarket competition on bank profitability is stronger when banks interact in more competitive markets. However, the anti-competitive effect of multimarket contacts is lessened following an exogenous shock to banks' branch networks. Banks that were more exposed to the shock experience worsened competitive positions and no longer benefited from multimarket contacts.