Actual Competition, Potential Competition, and Bank Profitability in Rural Markets

The nature of the relationship between the structure of the market in which banks operate-the number and size distribution of actual competitors in a market-and their performance has been examined in a considerable number of empirical studies over the past 20 years.' Industrial organization economists have investigated the structure; performance relationship for a wide variet). of intraand interindustn samples of firms. The typical maintained hypothesis has been that explicit or tacit collusion is more likely in markets with a limited number of large competitors and should result in a statistically significant positive relationship between market concentration and the profitability of firms operating in the market. Definitive support for this h)pothesis implies that an activist antitrust policy aimed at limiting merger-related increases in concentration is an appropriate public policy goal. A positive concentration/ profits relationship has been found in some, but far from all, of the empirical studies investigating bank market structure and performance. The mixed results of this body of empirical work have been interpreted in widely different ways.