Entry and Competition in Highly Concentrated Banking Markets

10 Pages Posted: 11 Mar 2003  

Nicola Cetorelli

Federal Reserve Bank of New York

Abstract

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.

Keywords: Banks, Market Structure, Concentration, Entry, Competition

JEL Classification: G21, L11, L12, L80

Suggested Citation

Cetorelli, Nicola, Entry and Competition in Highly Concentrated Banking Markets. Economic Perspectives, Fourth Quarter, 2002. Available at SSRN: https://ssrn.com/abstract=377741 or http://dx.doi.org/10.2139/ssrn.377741

Nicola Cetorelli (Contact Author)

Federal Reserve Bank of New York ( email )

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HOME PAGE: http://nyfedeconomists.org/cetorelli/

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