The Efficiency Cost of Market Power in the Banking Industry: A Test of the `Quiet Life' and Related Hypotheses

Posted: 5 May 1998

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Timothy H. Hannan

Federal Reserve Board - Department of Research & Statistics

Abstract

Traditional concerns about concentration in product markets have centered on the social losses associated with the mispricing that occur when market power is exercised. This paper focuses on a potentially greater loss from market power -- a reduction in cost efficiency brought about by the lack of market discipline in concentrated markets. We employ data from the commercial banking industry, which produces very homogeneous products in multiple markets with differing degrees of market concentration. We find the estimated efficiency cost of concentration to be several times larger than the social losses from mispricing as traditionally measured by the welfare triangle.

JEL Classification: G21, G28, L11, L41, L89, G34

Suggested Citation

Berger, Allen N. and Hannan, Timothy, The Efficiency Cost of Market Power in the Banking Industry: A Test of the `Quiet Life' and Related Hypotheses. Available at SSRN: https://ssrn.com/abstract=6017

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Timothy Hannan

Federal Reserve Board - Department of Research & Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States
202-452-2919 (Phone)
202-452-3819 (Fax)

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