Operationalizing and Measuring Competition: Determinants of Competition in Private Banking Industry in India

Kv, Bhanu Murthy and Deb, Ashis Taru (2008): Operationalizing and Measuring Competition: Determinants of Competition in Private Banking Industry in India.

Abstract

Using an appropriate theoretical framework and econometric methodology, the study has sought to measure and model competition in private banking industry in India in an attempt to analyse the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation provided the motivation behind the study. It used the concept of competition proposed by Stigler (1961) and measured it by Bodenhorn’s (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure-Conduct-Performance paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price cost margin, One basic contention of the study is that competition goes beyond “conduct” and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition.

• Item Type: MPRA Paper
• Language: English
• Keywords: Competition;Structure-Conduct-Performance;Banking reform;Tobit model
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D41 - Perfect Competition; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D40 - General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C25 - Discrete Regression and Qualitative Choice Models ; Discrete Regressors ; Proportions ; Probabilities; D - Microeconomics > D4 - Market Structure, Pricing, and Design > D49 - Other

References

Ahluwalia, M.S. (1999) Reforming India’s Financial Sector: An Overview, in J. Hansen and S. Kathuria, ed. India: A financial sector for the twenty-first century. New Delhi: Oxford University Press, pp. 29-54.

Amel, D. F. and Rhoades, S.A. (1988) Strategic Groups in Banking, Review of Economics and Statistics, 70(1), pp.685-9.

Bain, J. (1956) Barriers to New Competition. Mass: Harvard University Press.

Bain, J S. (1968) Industrial Organisation. New York: John Wiley and sons.

Baldwin, W. L. (1987) Market Power, Competition and Antitrust Policy. Illinois: Irwin.

Biswas, P. K. and Deb, A.T. (2004) Determinants of NPAs in the Indian Public Sector Banks, The ICFAI Journal of Bank Management, 3(3), pp.15-45.

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(11), pp.2191-2214.

Bhattacharya, P. C and Sivasubramaian (2001) Aspects of Banking Sector Reforms in India, Economic and Political Weekly, 36(43), pp.4151-4156.

Bodenhorn, H. (1990) Entry, Rivalry and Free banking, Review of Economics and Statistics, 72(4), pp. 682-686.

Bresnahan, T.F., and Reiss, P.C. (1991) Entry and Competition in Concentrated markets, Journal of Political Economy, 99(5), pp.977-1009.

Burgess, G. H. (1988) Industrial Organisation. New Jersy: Prentice Hall.

Chaudhury, S. (2002) Some Issues of Growth and Profitability in Indian Public Sector Banks, Economic and Political weekly, 37(22), pp.2155-2162.

Comanor, W.S. and Wilson, T. A. (1974) Advertising and Market Power. Cambridge, Mass.: Harvard University Press.

Davies, S. and Lyons, B. (1991) Economics of Industrial Organisation. New York: Longman.

Deb, A.T. (2004) Market Structure and Entry: A Study of the Determinants of Market Concentration in Private Domestic Banking Industry in India, Paper presented in 6th Annual Conference on Money and Finance, Indira Gandhi Institute for Development Research, Mumbai. Deb, A.T. (2005) The Impact of Deregulation on Private Banking Industry. Unpublished Ph.D. thesis submitted to University of Delhi.

Deb, A.T. and K.V. Bhanumurthy, (2006) “Strategic Groups in Indian Private Banking Industry.” Paper presented in 8th Annual Conference on Money and Finance at IGIDR, Mumbai.

Demstez, H. (1973) Industry Structure, Market Rivalry and Public Policy, Journal of Law and Economics, 16(2), pp.1-9.

Demstez, H. (1995) The Economics of Business Firms: Some Critical Commentaries. New York: Cambridge University Press.

Denizer, C. (1997) The Effect of Financial Liberalisation and New Bank Entry on Market Structure and Competition in Turkey, Research Policy Working Paper, WPS no 1839, World Bank, Washington DC.

Dosi, G. (1988) Sources, Procedures, and Microeconomic effects of innovation, Journal of Economic Literature, 26(3), pp.1120-1171.

Eatwell, J., Milgate, M. and Newman, P. (1988) The New Palgrave Dictionary of Economics, vol.1. London: Macmillan Press Ltd.

Fama, E. and Laffer, A. (1972) The Number of firms and Competition, American Economic Review, 62(4), pp.670-674.

Ferguson, P. and Ferguson, G. (1994) Industrial Economics. London: Macmillan Press Ltd.

Gerosky, P. A. (1990) Innovation, Technological Opportunity and Market Structure, Oxford Economic Papers, 42(3), pp.586-602.

Gerosky, P. A. (1989) Entry, Innovation and Productivity Growth, Review of Economics and Statistics, 71(4), pp.572-578.

Gibson, R. A. (1984) Bank Market Structure and Competition, Journal of Money, Credit and Banking, 16(4), pp.616-645.

Ghosh, Saibal and Prasad, A. (2005), Competition in Indian Banking, IMF Working Paper, July, paper 05/141.

Gibson, R. A. (1984) Bank Market Structure and Competition, Journal of Money, Credit and Banking, 16(4), pp.616-645.

Gort, M. (1963) Analysis of Stability and Change in Market Share, Journal of Political Economy, 71(1), pp.51-63.

Gort, M. and Kleeper, S. (1982) Time Paths in the Diffusion of Product innovations, Economic Journal, 92(367), pp. 630-53.

Griffith, A., and Walls, S. (1998) Intermediate Micro Economics: Theory and Applications. New York: Long man.

Gupta, V.K. (1983) A Simultaneous Determination of Structure, Conduct and Performance in Canadian Manufacturing, Oxford Economic Papers, 35(2), pp. 281-301.

Gupta, V.K. (1972) Some Factors Relating to Concentration in Indian Industries: A Statistical Analysis, Artha Vijnana, 14, pp.374-403.

Gupta, V.K.(1985) Profit Margin Performance and Market Structure in Indian Manufacturing Industries, Artha Vijnana , 27(1), 67-85.

Hannan, T. H. (1991) Foundations of the Structure-Conduct-Performance Paradigm in Banking, Journal of Money, Credit and Banking, 23(1), pp. 68-84.

Hay, D. and Morris, D. (1991) Industrial Economics and Organization: Theory and Evidence. London: Oxford University Press.

Hayashi, F. and Sims, C. (1983) Nearly Efficient Estimation of Time-Series Models with Predetermined, but Not Exogenous, Instruments, Econometrica, 51( 3), pp.783-798.

Hayes, S. Spence, A.M. and Marks, D.V.P. (1983) Competition in the Investment Banking Industry. Harvard University Press: Cambridge.

Hawtrey, R.G. (1943) Competition from Newcomers, Economica, 10(new series: 37-40), pp.219-222.

Heggestad, A. A. and Rhoades, S.A. (1976) Concentration and Firm Stability in Commercial Banking, Review of Economics and Statistics, 58(4), pp. 443-452.

Hymer, S. and Pashigian, P. (1962) Turnover of Firms as a Market Behaviour, Review of Economics and Statistics, 44(1), pp.82-87.

Indian Banks’ Association (1995) Indian Banking Performance Highlights: 1991-94, IBA Bulletin, January, pp.240-243.

Indian Banks’ Association (1997) Indian Banking Performance Highlights: 1991-96, IBI Bulletin, Special issue, pp.238-242.

Indian Banks’ Association (2001) Database on Indian Banking: 1997-2000, IBA Bulletin, March, pp 239-241.

Jongeneel, R. and A.Tonini, (2003) Primary Dairy Production in Poland and Hungary: a Structure, Conduct, Performance approach, Bulgarian Journal of Agricultural Science, 9(2), pp.135-148.

Joseph, M. and Nitsure, R. R (2002) WTO and Indian Banking Sector: The Road Ahead, Economic and Political Weekly, 37(24), pp. 2315-2322.

Jr, C.D.D, Kamerschen, D.R., Peter G., Klein, P.G. and Lisa Ford Voeks, L.F. (2002) Structure, conduct and performance: a simultaneous equations approach, Applied Economics, 34(17), pp. 2135 – 2141.

Malgi, T. (1992) Private Sector Banks: Bright days ahead, Economic and Political Weekly, 27(6), pp.301-302.

Mann, H.M (1966). Seller Concentration, Barriers to Entry and Rates of return in Thirty Industries, 1959-60, Review of Economics and Statistics, 48(3), pp.296-307. Mas-Colell, A., Whinston, M.D. and Green, J.R. (1995) Microeconomic Theory. New York: Oxford University Press.

Mason, E.S. (1939) Price and Production Policies of Large Scale Enterprises, American Economic Review Supplement, 29 pp. 61-74.

Mathur, K.B.L. (2002) Public Sector Banks in India: Should they be privatized? Economic and Political Weekly, June 8.

McGuckin, R. (1972) Entry, Concentration Change and Stability of Market Share, Southern Economic Journal, 38(3), pp.363-70.

Muller, D. C. (1986) Profits in the long run. Cambrige: Cambridge University Press.

Bhanu Murthy, K.V. and Deb, A.T.(2006) Strategic Groups in Indian Private Banking Industry. Paper presented in 8th Annual Conference on Money and Finance, Indira Gandhi Institute for Development Research, Mumbai.

Narasimham, M. (1991) Report on the Financial System, government of India.

Nickell, S. J. (1996) Competition and Corporate Performance, Journal of Political Economy, 104(4), pp.724-746.

Newmann, H.H. (1978) Strategic Groups and the Structure- Performance Relationship, Review of Economics and Statistics, 60(1), pp.417-27.

Molyneux, P. and Forbes, W. (1995), Market Structure and European Banking, Applied Economics, 27(2), pp. 155-159.

Ornstein, S.I., Westen, J.F., Intriligator, M.D. and Shrieves, R.E. (1973) Determinants of Market Structure, Southern Economic Journal, 39(1-4), pp. 612-625.

Passmore, S. W. (1985) Strategic Groups and the Profitability of Banking, Federal Reserve Bank of New York, Research Paper no 8507.

Peltzman, S. (1977) The Gains and Losses from Industrial Concentration, Journal of law and Economics, 20(2), pp.229-63.

Peterson, H.C. and Lewis, W.C. (2001) Managerial Economics. New Delhi: Prentice Hall of India.

Reserve Bank of India, Statistical Tables relating to banks, various issues, Bombay.

Reserve Bank of India (1954) Banking and Monetary History of India, Bombay.

Reserve Bank of India, Report and Trends of Banking in India, various issues, Bombay.

Rees, R. D. (1975) Advertising, Concentration and Competition: A comment and Further Results, Economic Journal, 85(337), pp.165-172.

Reid, G. (1987) Theories of Industrial Organization. Basil Blackwell: Oxford.

Rhoades, S. and Rytz, R. (1981) A Reexamination and Extension of the Relationship Between Concentration and Firm Rank Stability, Review of Economics and Statistics, 63(3), pp.446-451.

Santemoro, A. M. (1984) Modeling the Banking Firm, Journal of Money, Credit and Banking, 16(4), pp. 576-602.

Santos, R.A. (1995) Dynamics of Market Structure, Advertising and Profitability: A VAR approach, Applied Economics, 27(7), pp.631-36.

Sarkar. J, Sarkar, S., and Bhaumik, S. (1996) Does Ownership Always Matter? Evidence from Indian Banking Industry, Journal of Comparative Economics, 26(2), pp. 262-281.

Sarkar. J. (1999) India’s banking sector: Current Status, Emerging challenges, and policy imperatives in globalized environment, in J. Hansen and S. Kathuria, eds. India: A financial sector for the twenty-first century. New Delhi: Oxford University Press, pp. 71-131.

Saving, T. (1970) Concentration Ratio and Degree of Monopoly, International Economic Review, 11(1), pp.139-146.

Sawyer, M. (1981) The Economics of Industries and Firms: Theory, evidence and Policy. London and Sydney: Croom Helm.

Schmalensee, R. (1989) Inter-Industry Studies of Structure and Performance in Schmalensee, R. and Willing, R. ed. Handbook of Industrial Organisation, volume North Holland, Amsterdam.

Shepherd, W.G. (1972) The Elements of Market Structure, Review of Economics and Statistics, 54(1), pp. 25-37.

Siddharthan, N.S. and Pandit, B.L. (1992) Deregulations, Entry and industrial Performance: The Impact of Recent Indian Policy Changes, Working Paper No E/152/92, Institute of Economic Growth.

Simon, H. A. and Bonini, C.P. (1958) The Size Distribution of Business Firms, American Economic Review, 48, pp. 607-17.

Shirai and Rajsekaran (2001) Is India’s Banking Sector Reform successful? From the perspective of the Governance of the Banking System. Mimeo, Keio University.

Shubik, M (1976) A Non-cooperative model of a Closed Economy With Many Traders and Two Banks, Zeitschrift fur Nationalokonomie, 36, pp.10-18.

Shubik, M. (1990) A Game Theoretic Approach to the Theory of Money and Financial Institutions, in B.H. Friedman, and F.H. Hahn eds., Handbook of Monetary Economics, vol.1.Oxford: Elsevier Science Publishers B.V., pp.172-218

Shy, O. (1996) Industrial Organisation: Theory and Applications. Cambridge: The MIT Press.

Stigler, G.J. (1961) The Economics of Information, Journal of Political Economy, 69(3), pp.213-25.

Subrahmanyam, G. (1993) Productivity Growth in India’s Public Sector Banks: 1970-89, Economic and Political Weekly, 9(2), pp. 209-223.

Sutton, C. J. (1974) Advertising, Concentration and Competition, Economic Journal, 84 (333), pp.56-69.

Telser, L.G. (1964) Advertising and Competition, Journal of political Economy, 72(6), pp.537-562.

Waterson, M. (1984) Economic Theory of Industry. Cambridge: Cambridge University Press.

Winter, S. G. (1984) Schumpetarian competition in Alternative Technological regimes, Journal of Economic Behaviour and Organisation, 5(4), pp. 287-320.