Measuring Multi-Product Banks' Market Power Using the Lerner Index

40 Pages Posted: 13 Feb 2019

See all articles by Sherrill Shaffer

Sherrill Shaffer

University of Wyoming

Laura Spierdijk

University of Groningen

Date Written: February 13, 2019

Abstract

The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on the assumption that banks’ single aggregate output factor is total assets. This study identifies three limitations of the aggregate Lerner index that potentially distort its interpretation as a composite measure of market power. We investigate the empirical relevance of these limitations for a sample of U.S. banks covering the years 2011–2017. We establish an economically relevant bias in the value of the aggregate Lerner index and show that this bias may also affect regressions that use the Lerner index as a dependent or explanatory variable.

Keywords: multi-product banks, market power, Lerner index, consistent aggregation

JEL Classification: D43, L13, G21

Suggested Citation

Shaffer, Sherrill and Spierdijk, Laura, Measuring Multi-Product Banks' Market Power Using the Lerner Index (February 13, 2019). CAMA Working Paper No. 17/2019. Available at SSRN: https://ssrn.com/abstract=3333506 or http://dx.doi.org/10.2139/ssrn.3333506

Sherrill Shaffer (Contact Author)

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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