Entry and Competition in Highly Concentrated Banking Markets
Federal Reserve Bank of New York
Economic Perspectives, Fourth Quarter, 2002
This paper studies conditions of entry and competitive conduct in highly concentrated banking markets. Using a data set of local U.S. markets characterized by banking monopolies, duopolies and oligopolies with more than two banks, I analyze the relationship between the number of banks in a market with demographic characteristics of the markets themselves and the prevailing competitive conduct in these markets. Estimates are obtained for the minimum market size at which a second bank, a third, a fourth, etc. can enter and maintain long-run profitability. The results suggest no evidence of cartel-like behavior, where banks collude and maximize joint monopoly profits, even in markets with two or three banks only. They are more consistent with the competitive conduct predicted by models of oligopolistic behavior.
Number of Pages in PDF File: 10
Keywords: Banks, Market Structure, Concentration, Entry, Competition
JEL Classification: G21, L11, L12, L80
Date posted: March 11, 2003