Does market power affect performance in the dutch banking market? a comparison of reduced form market structure models

Abstract

This paper investigates whether reduced form market structure models can be used to test whether there is market power in the Dutch banking market. First, a traditional Structure-Conduct-Performance (SCP) model is introduced. Next, a simple Cournot-model is introduced, which results in a more flexible measure of market power for different market structures. Finally, the inclusion of a modified Efficiency hypothesis reduces identification problems. Theoretically speaking, the Cournot model provides a better foundation for testing the existence of market power than the SCP model. Likewise, explicitly correcting for and including efficiency results in a more correct test of the Efficiency hypothesis. Empirical results for Dutch data confirm that the introduced improvements based on the Cournot models are the only ones resulting in tests that are consistent with the underlying models. Evidence from the Cournot model suggests that we cannot reject the existence of market power, although its impact on performance may be small. It also formalizes the need for additional research into the importance of strategic interaction among banks.