The Panzar-Rosse Revenue Test and Market Power in Banking

Abstract

The Panzar-Rosse H statistic is a commonly used measure of market power in banking. It is widely believed that H > 0 is inconsistent with significant market power. This study rigorously disproves that perception. Instead, the possibility of H > 0 under conditions of substantial market power turns out robust to the timing of banks' actions, relative costs, choice of strategic variable, degree of product differentiation, strategy (static or dynamic), and degree of heterogeneity in banks' conduct (collusive versus fringe), and hence may be common in practice.

Performance of the Banking Sector of a Developing Country: A Non-Structural Model Using the Disequilibrium Approach

“…Hence, Spierdijk and Shaffer (2015) who derived these for the case when H > 0 (whereas our results suggest ≤ 0).…”

“…However, they concluded that an appropriately specified revenue equation can be used to test the degree of market power using the sign of H. Spierdijk and Shaffer (2015) demonstrated that H > 0 is not inconsistent with substantial market power as the traditional interpretation suggested and cautioned over such an interpretation of the H-statistic. However, our results show that ≤ 0 and is therefore not in the H > 0 category.…”

Note on a non-structural model using the disequilibrium approach: Evidence from Vietnamese banks

“…All of these different assessments of the degree of competition are consistent in suggesting that the Vietnamese system operated under monopoly during the 1999 -2009 period. This provides a robustness that makes this inference convincing and should help reduce any concerns that there are exceptions to the standard interpretation of the Panzar-Rosse H-statistic that can call into question inferences based upon it -see Spierdijk and Shaffer (2015).…”

“…Bikker et al (2012) discussed the problems associated with interpreting H according to these rules. However, they concluded that an appropriately specified revenue equation can be used to test the degree of market power using the sign of H Spierdijk and Shaffer (2015). demonstrated that H > 0 is not inconsistent with substantial market power as the traditional interpretation suggested and cautioned over such an interpretation of the H-statistic.…”

Competition in the clearing and settlement industry

“…Bikker et al (2012) prove that a negative H-statistic does not necessarily indicate a monopoly even though the equilibrium test indicates long-run equilibrium. They argue that the H-statistic jointly measures competitive conduct and long-run structural equilibrium and, to evaluate its applicability, additional information is needed about costs, market equilibrium, and even market demand elasticity (see also Shaffer, 2004a andShaffer, 2015). Therefore, we also analyze competition in the clearing and settlement industry by estimating the Lerner index and Boone indicator.…”