The Panzar-Rosse Revenue Test and Market Power in Banking

39 Pages Posted: 6 Nov 2014 Last revised: 10 Mar 2015

See all articles by Laura Spierdijk

Laura Spierdijk

University of Groningen

Sherrill Shaffer

University of Wyoming

Date Written: March 10, 2015

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. The theoretical part of this study rigorously disproves this perception. Instead, the possibility of H>0 under conditions of substantial market power turns out robust to the timing of firms' actions, relative costs, choice of strategic variable, degree of product differentiation, strategy (static or dynamic), and degree of heterogeneity in firms' conduct (collusive versus fringe), and hence may be common in practice. The empirical part of this study analyzes a US banking duopoly to illustrate the problem. We find 'competitive' estimates of H but, consistent with a priori expectations, non-competitive outcomes according to two alternate measures of competition. Moreover, our bank-specific estimates of H are mutually inconsistent, suggesting additional problems with the Panzar-Rosse test.

Keywords: banking competition, Panzar-Rosse method, banking oligopoly

JEL Classification: D4, L1

Suggested Citation

Spierdijk, Laura and Shaffer, Sherrill, The Panzar-Rosse Revenue Test and Market Power in Banking (March 10, 2015). Available at SSRN: https://ssrn.com/abstract=2519503 or http://dx.doi.org/10.2139/ssrn.2519503

Laura Spierdijk (Contact Author)

University of Groningen ( email )

PO Box 800
Groningen, 9700 AV
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)

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