The Panzar-Rosse Revenue Test: To Scale or Not to Scale

34 Pages Posted: 24 Aug 2009 Last revised: 10 Mar 2015

See all articles by Jacob Antoon Bikker

Jacob Antoon Bikker

De Nederlandsche Bank; Utrecht University - School of Economics

Sherrill Shaffer

University of Wyoming

Laura Spierdijk

University of Groningen

Date Written: August 21, 2009

Abstract

The Panzar-Rosse model is a widely applied method to assess competitive conduct. In particular, it has been extensively used to analyze the competitive climate in the banking industry. To correct for differences in firm size, many empirical papers estimate a Panzar-Rosse revenue function with total assets (or another proxy of firm size) as a control variable. Other studies estimate a Panzar-Rosse price function instead of a revenue equation, in which the dependent variable is total revenue divided by total assets. This paper shows that both a scaled Panzar-Rosse revenue equation and a Panzar-Rosse price function cannot be used to infer the degree of competition. Only an unscaled revenue equation yields a valid measure for competitive conduct. Furthermore, we show that the appropriate Panzar-Rosse test, based on an unscaled revenue equation, generally requires additional information about costs and market equilibrium to allow meaningful interpretations. Our theoretical findings are confirmed by an empirical analysis of competition in the banking industry, based on a sample covering more than 110,000 bank-year observations on almost 18,000 banks in 67 countries during the period 1986-2004.

Keywords: Panzar-Rosse test, competition, firm size

JEL Classification: D40, L11

Suggested Citation

Bikker, Jacob Antoon and Shaffer, Sherrill and Spierdijk, Laura, The Panzar-Rosse Revenue Test: To Scale or Not to Scale (August 21, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1458889 or http://dx.doi.org/10.2139/ssrn.1458889

Jacob Antoon Bikker (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Sherrill Shaffer

University of Wyoming ( email )

P.O. Box 3985
Laramie, WY 82071-3985
United States
307-766-2173 (Phone)
307-766-5090 (Fax)

Laura Spierdijk

University of Groningen ( email )

PO Box 800
Groningen, 9700 AV
Netherlands

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