Competition, concentration and their relationship: an empirical analysis of the banking industry

This paper examines competitive conditions and market structure in the banking industry, and investigates their interrelationship. Competition is measured using the non-structural Panzar-Rosse model, which assesses the elasticities of interest revenues with respect to changes in banks’ input prices. In order to distinguish competitive behaviour on local, national and international markets, for each country, three subsamples are taken: small or local banks, medium-sized banks and large or international banks. For all 23 countries considered, estimations indicate monopolistic competition. Competition appears to be weaker in local markets and stronger in international markets. Subsequently, a relationship for the impact of the market structure on competition is derived and tested empirically, providing support for the conventional view that concentration impairs competitiveness. 1 Section Banking and Supervisory Strategies, Directorate Supervision, De Nederlandsche Bank (DNB), POBox 98, 1000 AB Amsterdam, email: [email protected]. The second author was working for DNB when this paper was written and is now at the McGill University, Montreal, Canada. The views expressed in this paper are personal and do not necessarily reflect those of DNB. The authors owe a debt of gratitude to referees of the DNB Staff Reports Series for useful comments and Miriam Holman-Rijken for excellent statistical assistance.