Decentralized Market Power in Credit Markets

Silva, Thiago and Souza, Sérgio and Guerra, Solange and Tabak, Benjamin (2022): Decentralized Market Power in Credit Markets.

Abstract

The literature measures a bank's market power using aggregated data at the bank level. However, market power may be exercised in a decentralized way by each bank branch and for specific banking products. This article proposes a novel methodology for estimating a bank's market power at the branch level in each locality and for each banking product. We find significant heterogeneity in banks' market power by locality and product, even within the same bank. Our results suggest that aggregate measures of bank market power may be misleading and distorted. Accurate quantification of market power requires fine-grained measures, which are essential for enhancing financial regulation and competition.

• Item Type: MPRA Paper
• Language: English
• Keywords: market power, Lerner index, competition, credit market, COVID-19
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms

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