Bank Pricing Under Oligopsony-Oligopoly: Evidence from 103 Developing Countries
26 Pages Posted: 14 Feb 2012
Date Written: February 8, 2012
We propose a generic oligopsony-oligopoly model to study bank behavior under uncertainty in developing countries. We derive a pricing structure that acknowledges market power in both the deposit and loan markets and identify two theoretical components to the loan rate: a rent extraction component resulting from the interaction between the choke price of loans and prevailing banking structures, and a markup on deposit funding costs that captures the transformation efficiency of financial intermediation. We then test our structural specification with longitudinal data for 103 non-OECD countries and find that both the market structure under uncertainty and the deposit rate matter significantly in pricing. However, the role played by the rent-extraction share in pricing, on average, dominates funding costs in developing countries, and so underscores the importance of market structure in banks’ pricing power.
Keywords: intermediation, bank pricing, market structure, uncertainty, developing countries
JEL Classification: C33, G21, L13
Suggested Citation: Suggested Citation