Abstract
We use the structure-performance model and regression analysis to investigate a number of analytical issues that often arise in evaluating competition in connection with bank mergers and that are generally relevant to mergers in other industries. Perhaps our most consistent and strongest finding is that the local market HHI is positively and significantly related to profitability. We also find that the number of organizations and the level of recent deposit growth may provide some additional information on the level of competition. Finally, several variables including market size, the number of large banking firms, deposits per office, and resident migration rates exhibit similar relationships to profitability in the bivariate analysis, suggesting that there may be some characteristic associated with market size, density, or attractiveness that is important for competition.
Similar content being viewed by others
References
Barla, Philippe (2000) ‘Firm Size Inequality and Market Power’, International Journal of Industrial Organization, 18, 693–722.
Belsley, David A., Edwin Kuh, and Roy E. Welsch (1980) Regression Diagnostics. New York: John Wiley & Sons.
Berger, Allen, and Timothy Hannan (1998) ‘The Efficiency Cost of Market Power in the Banking Industry: A Test of the ‘Quiet Life’ and Related Hypotheses’, Review of Economics and Statistics, 80, 454–465.
Claycombe, Richard J. (2000) 'The Effects of Market Structure on Price of Clothing and Household Furnishings., International Journal of Industrial Organization, 18, 827–841.
Demsetz, Harold (1973) ‘Industry Structure, Market Rivalry, and Public Policy’, Journal of Law and Economics, 16, 1–9.
Edwards, Corwin (1955) ‘Conglomerate Bigness as a Source of Power’, in Business Concentration and Price Policy, NBER. Princeton: Princeton University Press, pp. 331–352.
Hannan, Timothy H. (1991) ‘Foundations of the Structure-Conduct-Performance Paradigm in Banking’, Journal of Money, Credit, and Banking, 23, 68–84.
Hannan, Timothy H. (1997) ‘Market Share Inequality, the Number of Competitors, and the HHI: An Examination of Bank Pricing’, Review of Industrial Organization, 12, 23–35.
Hannan, Timothy H., and Nellie Liang (1995) ‘The Influence of Thrift Competition on Bank Business Loan Rates’, Journal of Financial Services Research, 9, 107–122.
Hannan, Timothy H., and Robin Prager (1998) ‘Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry’, Journal of Industrial Economics, 46, 433–452.
Kamerschen, David R., and W. Scott Frame (1997) ‘The Profit-Structure Relationship in Legally Protected Banking Markets Using Efficiency Measures’, Review of Industrial Organization, 12, 9–22.
Kiser, Elizabeth (2000) ‘Household Switching Costs in Banking: Findings from the Michigan Survey of Consumers’, mimeo, Federal Reserve Board.
Pilloff, Steven J. (1999a) ‘Does the Presence of Big Banks Influence Competition in Local Markets?’, Journal of Financial Services Research, 15, 159–177.
Pilloff, Steven J. (1999b) ‘Multimarket Contact in Banking’, Review of Industrial Organization, 14, 163–182.
Pilloff, Steven J. and Stephen A. Rhoades (2000) ‘Do Large, Diversified Banking Organizations Have Competitive Advantages?’, Review of Industrial Organization, 16, 287–302.
Pilloff, Steven J. (2001) ‘Commercial Banking’, in Walter Adams and James Brock, eds., The Structure of American Industry, Ch. 9. New Jersey: Prentice-Hall, pp. 224–254.
Rhoades, Stephen A. (1995) ‘Market Share Inequality, the HHI, and Other Measures of the Firm-Composition of A Market’, Review of Industrial Organization, 10, 657–674.
Rhoades, Stephen A. (1997) ‘Have Barriers to Entry in Commercial Banking Disappeared?’, Antitrust Bulletin, 42, 997–1013.
Rhoades, Stephen A. (2000a) ‘Bank Mergers and Industrywide Structure, 1980–98’, Staff Studies, 174, Federal Reserve Board, Washington, D.C.
Rhoades, Stephen A. (2000b) ‘Retail Commercial Banking: An Update on A Period of Extraordinary Change’, Review of Industrial Organization, 16, 357–366.
Schmalensee, Richard (1989) ‘Inter-Industry Studies of Structure and Performance’, in Richard Schmalensee and Robert D. Willig, eds., Handbook of Industrial Organization, Vol. 2. NewYork: North Holland, pp. 951–1009.
Sharpe, Steven A. (1997) ‘The Effect of Consumer Switching Costs on Prices: A Theory and its Application to the Bank Deposit Market’, Review of Industrial Organization, 12, 79–94.
Stiglitz, Joseph E. (1986) ‘Introduction’, in Joseph E. Stiglitz and G. Frank Mathewson, eds., New Developments in the Analysis of Market Structure. Cambridge: The MIT Press, p. XVI.
Whalen, Gary (1996) ‘Non-Local Concentration, Multimarket Linkages, and Interstate Banking’, Antitrust Bulletin, XLI, 365–397.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Pilloff, S.J., Rhoades, S.A. Structure and Profitability in Banking Markets. Review of Industrial Organization 20, 81–98 (2002). https://doi.org/10.1023/A:1013362913973
Issue Date:
DOI: https://doi.org/10.1023/A:1013362913973