Prices, Nonprices, and Concentration In Commercial Banking

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.This study examines the impact of market structure on price and nonprice competition for household customers in commercial banking markets. Using a new survey of bank prices and services in metropolitan areas, we are able to test the effect of firm concentration on a wide range of specific prices as well as on several dimensions of nonprice competition. I. INTRODUCTIONMost of the existing literature has found a weak positive relationship between monopoly power and bank prices. The new data set allows us to improve on these studies in several ways. Although banks are multiproduct firms, most studies have been limited to analyzing prices on a single bank product. Such studies have analyzed business loan rates [3, 11, 14], consumer loan rates [6], and demand deposit service charges [1] . By considering only one price, the studies may well be underestimating the total impact of monopoly power on bank performance.Studies that have analyzed the impact of market structure on a whole series of price variables have been hampered by deficiencies in available data that consist of yearly averages of prices [12,16] . For these studies, the banking product is not defined in a homogeneous manner (e.g. differences in loan size or quality are not considered). Similarly, the studies of the stlucture profWltability relationship [2, 8, 12, 16] may be underestimating the impact of market structure on profits, because banks with monopoly power may choose to trade high profits for reduced risk via *The authors wish to thank a referee for valuable comments on an earlier draft and Janice Decker for her help in the statistical work in this study.

The Simultaneity of Bank Decision‐making, Market Structure, and Bank Performance

“…Similarly, market power was an important explanatory variable in the 3SLS version of the average loan rate equation which agrees with the OLS results in studies by Heggestad and Mingo [10], Kaufman [14], and Rose and Fraser [26]. The principal differences between our 3SLS and the OLS estimates arise over the link between loans and deposits.…”

“…For example, in the average service charges equation, the 3SLS version indicates that deposit charges are systematically related to the ratio of demand deposits to total deposits, wage expenses, urbanization, branching status, holding company affiliation, and the Herfindahl index. These results are in general agreement with the findings of Heggestad and Mingo [10] and Rose and Fraser [26]. However, they are at odds with the conclusions of Fraser and Rose [7] and Ware [35], in which market structure was not a significant determinant of bank service charges.…”

The Industrial Organization of Banking

“…Heggestad and Mingo (1976), for instance, proposed that quality of service-such as weekly office hours of walk-in or drive-in services and availability of 24-hour automated services derived from survey data-influences behavior of bank customers and offered evidence suggesting an inverse relationship between bank concentration and service quality levels. Heggestad and Mingo (1976), for instance, proposed that quality of service-such as weekly office hours of walk-in or drive-in services and availability of 24-hour automated services derived from survey data-influences behavior of bank customers and offered evidence suggesting an inverse relationship between bank concentration and service quality levels.…”

Does market power affect performance in the dutch banking market? a comparison of reduced form market structure models

“…6 On a more theoretical level, in its most basic form it can lead to the same 2-player competitiveness that burdens many (simple) Bertrand models. 7 See Berger and Humphrey (1991) for evidence on average costs in banking and Heggestad and Mingo (1976) on SCP models and nonlinear average cost curves.…”