Friday, November 1, 2013
Antonis Michis (Central Bank of Cyprus) is Measuring Market Power in the Banking Industry in the Presence of Opportunity Cost.
ABSTRACT: A conjectural variations model is developed to measure market power in the banking industry. Unlike previous studies, which use complete cost function specifications in the modelling framework, this study defines marginal cost based on an opportunity cost, which is represented by the interest rate on minimum reserves offered by the monetary authorities in a country. Deposits with the monetary authorities are considered to be an alternative use of available funds that are usually allocated to loans. The estimates of market power in the banking industry in Cyprus, using the proposed model, reject the monopoly hypothesis.