Bank Pricing Under Oligopsony-Oligopoly: Evidence from 103 Developing Countries

26 Pages Posted: 14 Feb 2012

See all articles by Walid Marrouch

Walid Marrouch

Lebanese American University; CIRANO

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: February 8, 2012

Abstract

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

Marrouch, Walid and Turk-Ariss, Rima, Bank Pricing Under Oligopsony-Oligopoly: Evidence from 103 Developing Countries (February 8, 2012). BOFIT Discussion Paper No. 1/2012. Available at SSRN: https://ssrn.com/abstract=2004294 or http://dx.doi.org/10.2139/ssrn.2004294

Walid Marrouch

Lebanese American University ( email )

P.O. Box 13 - 5053
Chouran-Beirut
Beirut, 1102 2801
Lebanon

CIRANO ( email )

1130 Rue Sherbrooke #1400
Montreal, Quebec H3A 2M8
Canada

Rima Turk-Ariss (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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