Market Structure and Quality: An Application to the Banking Industry

40 Pages Posted: 20 Jul 2003

Date Written: November 2002

Abstract

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

Dick, Astrid Andrea, Market Structure and Quality: An Application to the Banking Industry (November 2002). Available at SSRN: https://ssrn.com/abstract=402140 or http://dx.doi.org/10.2139/ssrn.402140

Astrid Andrea Dick (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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