Estimating the intensity of price and non-price competition in banking: an application to the Spanish case

Carbo Valverde, Santiago and Fernández de Guevara y Rodoselovics, Juan and Humphrey, David and Maudos Villarroya, Joaquín (2005): Estimating the intensity of price and non-price competition in banking: an application to the Spanish case. Published in: Documento de Trabajo, Fundación BBVA (2005)

Abstract

We model bank oligopoly behaviour using price and non-price competition as strategic variables in an expanded conjectural variations framework. Rivals can respond to changes in both loan and deposit market prices as well as (non-price) branch market shares. The model is illustrated using data for Spain which, over 1986-2002, eliminated interest rate and branching restrictions and set off a competitive race to lock-in expanded market shares. Banks use both interest rates and branches as strategic variables and both have changed over time. We illustrate the results using a regional vs. a national specification for the relevant markets. (97 words)

• Item Type: MPRA Paper
• Language: English
• Keywords: non-price competition, banking, market shares
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L13 - Oligopoly and Other Imperfect Markets; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Barros, P. (1995): “Post-entry expansion in banking: the case of Portugal”, International Journal of Industrial Organization 13, 593-611.

Barros, P. (1999): “Multi market competition in banking with an example from the case of Portuguese market”, International Journal of Industrial Organization 17, 335-352.

Bikker, J.A. and Haaf, K. (2002): “Competition, concentration and their relationship: an empirical analysis of the banking industry”, Journal of Banking and Finance 26, 2191-2214.

Canhoto, A. (2004): “Portuguese banking: a structural model of competition in the deposits market”, Review of Financial Economics 13, 41-63.

Carbó, S., Humphrey D. and Rodriguez, F. (2003a), “Bank deregulation is better than mergers”, Journal of International Financial Markets, Institutions and Money, 13, 429-449.

Carbó, S., Humphrey D. and Rodriguez, F. (2003b),”Deregulation, bank competition and regional growth“, Regional Studies 37(3), 227-237.

Carbó, S., López, R. and Rodriguez, F. (2003): “La medición de la competencia en los mercados bancarios regionales”, Revista de Economía Aplicada 3(9), 5-33.

Carbó, S. and Rodríguez. F. (2004): "The finance-growth nexus: a regional perspective", European Urban and Regional Studies 11(4), 357–372, forthcoming.

Cesari, V. and Chizzolini, B. (2002): “Branching and competition in the European banking industry”, Applied Economics 34, 2213-2225.

Coccorese, P. (2004): “Competition in markets with dominant firms: a note on the evidence from the Italian baking industry”, Journal of Banking and Finance, forthcoming. Corvoisier, S. and Gropp, R. (2002): “Bank concentration and retail interest rates”, Journal of Banking and Finance 26, 2155-2189.

De Bandt, O. and David, E. P. (2000): “Competition, contestability and market structure in European banking sectors on the eve of EMU”, Journal of Banking and Finance 24, 1045-2066.

Fernández de Guevara, J., Maudos, J. and Pérez, F. (2004): “Market power in European banking”, Journal of Financial Services Research, forthcoming.

Freixas, X. and Rochet, J. (1997): Microeconomics of Banking, Cambridge, MA: MIT Press.

Fuentelsaz, L. (1996): “Dinámica de la Competencia entre Cajas de Ahorros Españolas”, Investigaciones Económicas 20, 125–41.

Fuentelsaz, L. and Gómez, J. (2001) “Strategic and queue effects at entry in Spanish banking”, Journal of Economics and Management Strategy 10(4), 529-563.

Kim, M. and Vale, B. (2001): “Non-price strategic behaviour: the case of bank branches”, International Journal of Industrial Organisation 19, 1583-1602.

Maudos, J. (1998): “Market structure and performance in Spanish banking using a direct measure of efficiency”, Applied Financial Economics 8, 191-200.

Maudos, J. (2001): “Rentabilidad, estructura de mercado y eficiencia en el sector bancario español”, Revista de Economía Aplicada 9(25), 193-207.

Maudos, J. and Pérez, F. (2003): “Competencia vs. poder de mercado en la banca española”, Moneda y Crédito 217, 139-166.

Maudos, J. and Fernández de Guevara, J. (2004): “Factors explaining the interest margin in the banking sectors of the European Union”, Journal of Banking and Finance 28/9, 2259-2281.

Oroz, M. and Salas, V. (2003): “Competencia y eficiencia de la intermediación bancaria en España: 1977-2000”, Moneda y Crédito 217, 73-100.

Pinho, P. (2000): “The impact of deregulation on price and non-price competition in the Portuguese deposits market”, Journal of Banking and Finance 24, 1515-1533.