Tuesday, August 5, 2008
Posted by D. Daniel Sokol
József Molnár (Bank of Finland), provides an analysis on Market Power and Merger Simulation in Retail Banking.
ABSTRACT: This paper tests market power in the banking industry. First, I calculate price- cost margins predicted by di¤erent oligopoly models using discrete-choice demand estimates of own and cross-price elasticities. Second, I compare these predicted price-cost margins to price-cost margins computed with the observed interest rates and estimates of marginal costs. This paper is among the rst to apply this method- ology on a detailed, bank-level dataset from the retail banking sector. I extend the previous papers and illustrate the advantages of structural modelling by simulating a counterfactual merger experiment among pairs of the biggest banks and studying the unilateral e¤ect of the mergers on the interest rates. I provide another evidence that concentration measures (such as Her ndahl index) could be very misleading indicators of market power.