Sherrill Shaffer

A test of competition in Canadian banking

THE DEGREE OF COMPETITION in commercial banking, always a subject of some controversy, has assumed increasing importance in recent years. Actual and projected structural consolidation within the U.S. banking industry, reflecting both mergers and failures, has prompted concerns among some observers over the potential for monopoly power in local banking markets. In Europe, the lowering of economic barriers in 1992 affords the opportunity for consolidation of the banking structure across national boundaries as well. In assessing the likely impact of these changes on industry conduct, it is useful to explore the degree of competition already observed in a banking system that is significantly more concentrated than in the United States. It is also useful to measure the impact on competition of regulatory and structural changes in such a system. The Canadian banking industry exhibits both of these characteristics, and accordingly forms the basis of the present study. The findings are twofold: conduct in the industry has resembled perfect competition over the past twenty-five years, and furthermore has apparently undergone a slight pro-competitive change since the 1980 Bank Act revisions. These findings reinforce the view that neither the United States nor Europe is doomed to face substantial degradation of competition from projected changes in the structure of banking. Thousands of banks are not needed for highly competitive conduct. And

Assessing Competition with the Panzar-Rosse Model: The Role of Scale, Costs, and Equilibrium

The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium to infer the degree of competition. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample containing more than 100,000 bank-year observations on more than 17,000 banks in 63 countries during the years 1994 to 2004.

Conduct in a banking duopoly

Abstract This article applies two modern empirical tests of conduct to a duopoly banking market in south central Pennsylvania. The results provide a concrete counterexample to the presumption that high structural concentration must preclude substantially competitive conduct.

Competition in the U.S. banking industry

Abstract A non-linear, simultaneous-equation test of market power proposed by Bresnahan (1982) is applied to several decades of U.S. banking data. The results strongly reject collusive behavior and are consistent with perfect competition.

Can megamergers improve bank efficiency

Abstract This paper uses a fitted multiproduct translog cost function to simulate mergers between pairs of US commercial banks with assets exceeding

Non-structural measures of competition: Toward a synthesis of alternatives

1 billion and studies the predicted impact of such mergers on total costs. Thick frontier analysis reveals that variations in X-efficiency dominate scale, product mix, and branching efficiencies. Ex ante financial data imply that costs could potentially be reduced in nearly half of the possible mergers except those between banks each larger than

Local bank office ownership, deposit control, market structure, and economic growth

10 billion. Most cost-efficient mergers are across state lines, apparently a result of variations in product mix.

Stable cartels with a Cournot fringe

Abstract Procedures for detecting or measuring market power have been suggested in recent years by Iwata, Rosse and Panzar, and Bresnahan. This paper integrates elements from all three approaches to provide a single, more unified alternative to the structure-conduct-performance paradigm.

Banking conduct before the European single banking license: a cross-country comparison

The restructuring of commercial banking has heightened interest in its economic consequences both for the economy as a whole and for those most likely to bear adverse consequences: small businesses, small banks, and rural areas. Most previous research on bank restructuring focuses on changes in bank behavior. In contrast, this paper focuses on the empirical association between local economic performance and changes in local bank market regulation and structure. Findings suggest that mergers or acquisitions of local banks by nonlocal banks need not impair local economic growth, and may even have beneficial effects in rural markets, with the possible exception of farm-dependent areas. These findings are derived from empirical models that relate both shortrun and longrun growth in real per capita personal income to geographic restrictions on bank activity, local bank (deposit) market concentration, local or nonlocal ownership of local bank offices, and local or nonlocal control of local bank deposits. (This abstract was borrowed from another version of this item.)

Competition, economies of scale, and diversity of firm sizes

The notion of an industry structure characterized by a small group of dominant firms plus a competitive fringe has a long tradition. More recent work explores conditions under which such a pattern constitutes an equilibrium, assuming collusive behavior among one group of firms and price-taking behavior within the fringe [2; 3; 4; 5; 6; 14; 17]. The alternative case of a Courot fringe is analyzed briefly in Spulber [22, 471-73] and more extensively in Martin [14]. Here we adopt the framework of this literature and build on it by analyzing the size and uniqueness of the stable cartel when the fringe is Coumot; endogeneity of Courot versus Bertrand behavior within the fringe, given the stable cartel; possible endogeneity of the Stackelberg sequence of play between the cartel and the fringe; and effects of excludability from the cartel. Welfare effects are also briefly analyzed. Alternatively, cooperation within a cartel is equivalent to the outcome of horizontal mergers in the absence of synergies. As such, this paper presents a contrasting result to the analysis of exogenous Cournot mergers in Salant, Switzer, and Reynolds [18], endogenizes the merger decision, and demonstrates how a theory of mergers can be predicated on a Cournot fringe.