Relationships, Competition and the Structure of Investment Banking Markets

49 Pages Posted: 12 Jun 2006

See all articles by Bharat N. Anand

Bharat N. Anand

Harvard University - Strategy Unit

Alexander Galetovic

Universidad Adolfo Ibáñez; Stanford University - The Hoover Institution on War, Revolution and Peace; University of Padua - CRIEP

Multiple version iconThere are 2 versions of this paper

Abstract

It is well known that competition can destroy incentives to invest in firm-specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non-exclusive relationships, competition from arm's-length intermediaries, non-price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar-sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.

Suggested Citation

Anand, Bharat N. and Galetovic, Alexander, Relationships, Competition and the Structure of Investment Banking Markets. Journal of Industrial Economics, Vol. 54, No. 2, pp. 151-199, June 2006. Available at SSRN: https://ssrn.com/abstract=906906 or http://dx.doi.org/10.1111/j.1467-6451.2006.00279.x

Bharat N. Anand (Contact Author)

Harvard University - Strategy Unit ( email )

Harvard Business School
Soldiers Field Road
Boston, MA 02163
United States
617 495-5082 (Phone)
617 495-0355 (Fax)

Alexander Galetovic

Universidad Adolfo Ibáñez ( email )

Peñalolén
Santiago
Chile

Stanford University - The Hoover Institution on War, Revolution and Peace ( email )

Stanford, CA 94305-6010
United States

University of Padua - CRIEP ( email )

Padua
Italy

Register to save articles to
your library

Register

Paper statistics

Downloads
29
Abstract Views
1,154
PlumX Metrics