Relationships, Competition and the Structure of Investment Banking Markets

43 Pages Posted: 2 Jan 2001

See all articles by Bharat N. Anand

Bharat N. Anand

Harvard University - Strategy Unit

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Multiple version iconThere are 2 versions of this paper

Date Written: December 2000


Previous studies have acknowledged the tradeoff between relationships and competition in financial intermediation. In this paper, we explore the structural determinants of this tradeoff in the investment banking market, by deriving it from the underlying relationship technology. In the model, each of several banks incurs a sunk cost to establish a relationship with the same firm; all compete for doing its deals. Alternatively, the firm can do deals with other banks on an arm's-length basis. We study the role of a self-enforcing norm that restrains price undercutting on the incentives to make relationship-specific investments. We find that banks establish relationships even without local or aggregate monopoly power. Moreover, relationship banks make profits despite a competitive fringe of arm's-length banks. Finally, a dual market structure emerges in equilibrium - a small number of relationship banks serve firms that make large and frequent deals; a competitive arm's-length segment serves firms that make small and infrequent deals; and, competitive conditions in the fringe segment do not affect the relationship segment. In this way, we reconcile the coexistence of competitive and seemingly collusive features of this industry, which have been noted by many observers. We apply our framework to provide a logic for antitrust analysis of the industry, to examine the consequences of global competition and discuss the effect of the Internet on bank-firm relationships

JEL Classification: G20, L22

Suggested Citation

Anand, Bharat N. and Galetovic, Alexander, Relationships, Competition and the Structure of Investment Banking Markets (December 2000). HBS Comp. & Strategy Working Paper No. 01-038; CEA Working Paper No. 96. Available at SSRN: or

Bharat N. Anand (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )


Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )


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