Market Structure and Quality: An Application to the Banking Industry
40 Pages Posted: 20 Jul 2003
Date Written: November 2002
This paper presents empirical evidence consistent with the predictions of the endogenous sunk cost model of Sutton (1991), with an application to banks. In particular, banking markets remain concentrated regardless of market size. Given an asymmetric oligopoly where dominant and fringe firms coexist, the number of dominant banks remains unchanged with market size, with only the number of fringe banks varying across markets. Such structure is sustained by competitive investments in quality, with the level of quality increasing with market size and dominant banks providing higher quality than fringe banks. The analysis has implications for antitrust policy.
Keywords: Market structure, firm strategy, banking
JEL Classification: L1, G21
Suggested Citation: Suggested Citation