Concentration and Profitability in Non-MSA Banking Markets

Introduction Until quite recently, industrial-organization economists, bank regulators, and the Justice Department shared the view that market structure, that is, the number and size distribution of competitors in a market, is the primary determinant of the conduct and performance of banks operating in that market. More particularly, the traditional structuralist view is that the greater the share of the market controlled by the largest competitors or, alternatively, the higher the market concentration, the greater the likelihood that the firms will be able to agree collusively to raise prices above costs and so earn supranormal or monopoly profits. Concentration and bank profitability have been found to be positively related in a number of empirical studies, and these findings have been interpreted by structuralists as evidence that their position is correct.' The presumption that the structuralist view is valid is reflected in the Justice Department's merger guidelines, which are used by regulators to identify bank acquisitions and mergers likely to have anti-competitive effects. In essence, the guidelines generally proscribe bank regulators from approving acquisitions and mergers that would cause market concentration to rise above an assumed critical collusionfacilitating level.