Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

Tuesday, August 5, 2008

Market Power and Merger Simulation in Retail Banking

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.

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