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Review of Industrial Organization

, Volume 12, Issue 1, pp 59–78 | Cite as

Determinants of Entry and Profits in Local Banking Markets

  • Dean F. Amel
  • J. Nellie Liang
Article

Abstract

This paper estimates a two equation model of market entry and profits, utilizing data on entry into over 2,000 banking markets over the period 1977--88. The entry equations measure whether entry depends on incumbent firms' profits and other market attributes that reflect the long-term attractiveness of markets for entry. Market profits, assumed to follow a partial-adjustment process, are affected by entry directly and indirectly through market structure. The model also corrects for an unavoidable source of error in market-level profits for the banking industry. The estimates suggest that a competitive process is at work in banking markets that limits the ability of supra-normal profits to persist. Entry is more likely in markets that have high profits, consistent with previous empirical results that market structure adjusts more quickly when profits are supra-normal. Population and population growth are also strong determinants of entry. Entry, in turn, reduces profits in rural markets.

Entry banking branching potential competition 

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Copyright information

© Kluwer Academic Publishers 1997

Authors and Affiliations

  • Dean F. Amel
    • 1
  • J. Nellie Liang
    • 1
  1. 1.Financial Structure SectionFederal Reserve BoardWashington D.C.U.S.A

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