A Revenue-Based Frontier Measure of Banking Competition

Abstract

Standard indicators of banking competition frequently used in empirical studies have been: (a) the structure-conduct-performance (SCP) paradigm, which focuses on the degree of banking market concentration, usually a Herfindahl-Hirschman index (HHI) of deposit/loan market concentration; (b) the Lerner Index, which is a price mark-up measure as in (price — marginal cost)/price; and (c) the H-statistic, which indicates the degree to which changes in funding/factor input costs are associated with changes in output price. In practice, academic analyses have almost always applied only one of these three indicators to assess banking competition. While there is disagreement about which of these measures may ‘best’ reflect market competition, the expectation is that, since they purport to measure the same thing, they are strongly and positively correlated. Unfortunately, this expectation is not always met.