Wednesday, February 11, 2009
Policy Implications of Endogenous Sunk Fixed Costs in Banking: Has U.S. Antitrust Policy Been on the Wrong Track?
Posted by D. Daniel Sokol
David D. VanHoose, Baylor University - Department of Economics asks about the Policy Implications of Endogenous Sunk Fixed Costs in Banking: Has U.S. Antitrust Policy Been on the Wrong Track?
ABSTRACT: The application of U.S. antitrust policy toward mergers in the banking industry is based on past research suggesting that there is a trade-off between adverse effects on consumer welfare owing to potentially augmented market power and possible welfare-improving effects arising from efficiency gains. Recent research applying the theory of endogenous sunk fixed costs to the banking industry suggests that the current focus of bank antitrust policy on this trade-off may be misplaced. According to initial results obtained by work along these lines, the presence of endogenous sunk fixed costs arising from non-price competition among banks on the basis of product quality yields a lower bound on concentration in banking markets, implying that a few large banks typically will predominate. This policy brief provides an overview of the current basis of U.S. antitrust policy with regard to bank mergers, outlines the theory of endogenous sunk fixed costs, explains why and how the theory might apply to the banking industry, and evaluates whether antitrust policy should be altered in light of evidence offered to date.