Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement

18 Pages Posted: 21 Apr 2004  

Donatella Porrini

Universita di Lecce - Facolta di Economia

Giovanni Battista Ramello

University of Piemonte Orientale - A. Avogadro - Department of Public Policy and Public Choice; International Centre for Economic Research (ICER)

Date Written: April 14, 2004

Abstract

The antitrust intervention in banking has always been heavily influenced by considerations of stability. Regulation has historically given precedence to the stability objective, relegating thus competition to second place. In fact, in the case of banking, price competition tends to encourage overly speculative behaviours, which essentially entail acceptance of excessive risk, with a resultant volatility that could potentially harm depositors, and ultimately compromise the stability of the economic system as a whole.

The consequence of this approach is that banking market becomes extremely rigid on the supply side and structurally not equipped for a competitive orientation, and banks come to occupy a privileged position vis-a-vis governments that - to a greater or lesser extent, depending on the countries and the situations - enables them to sidestep the antitrust authorities.

In such a scenario, the trade-off between stability and competition cannot be totally resolved through traditional antitrust actions, which are sometimes at odds with the stability objective and hampered by the constraints of the previously defined regulatory framework.

It is precisely these considerations, found in a significant portion of the literature, that provide the starting base for the hypothesis of this work and namely the proposal of a novel demand side perspective, i.e. one which focuses on the central role of consumers in the competitive process. If intervention on the supply side is hampered a priori by the regulatory framework, it is nevertheless possible to implement pro-competition actions on the demand side, for example by enhancing the ability of consumers to change from one provider to the other without impacting on the market structure. In operational terms, the proposed approach is to leverage consumer mobility in order to stimulate the currently weakened competition between firms. This would make it possible to pursue the traditional antitrust objectives of efficiency and welfare maximisation, without necessarily impacting on stability.

Keywords: bank competition, financial stability, antitrust, lock-in, switching costs, consumers and competition, demand-oriented antitrust policy

JEL Classification: G21, G28, D18, K21, L40, L52

Suggested Citation

Porrini, Donatella and Ramello, Giovanni Battista, Competition in Banking: Switching Costs and the Limits of Antitrust Enforcement (April 14, 2004). Available at SSRN: https://ssrn.com/abstract=530483 or http://dx.doi.org/10.2139/ssrn.530483

Donatella Porrini

Universita di Lecce - Facolta di Economia ( email )

Ecotekne
Via per Monteroni
73100 Lecce
Italy

Giovanni Battista Ramello (Contact Author)

University of Piemonte Orientale - A. Avogadro - Department of Public Policy and Public Choice ( email )

Via Cavour 84
15100 Alessandria
Italy

International Centre for Economic Research (ICER) ( email )

Villa Gualino
Viale Settimio Severo, 63
10133 Torino
Italy

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