Market Power and Merger Simulation in Retail Banking

This paper tests market power in the banking industry. First, I calculate price-cost margins predicted by di¤erent oligopoly models using discrete-choice demand estimates of own and cross-price elasticities. Second, I compare these predicted price-cost margins to price-cost margins computed with the observed interest rates and estimates of marginal costs. This paper is among the \u85rsts to apply this method-ology on a detailed, bank-level dataset from the retail banking sector. I extend the previous papers and illustrate the advantages of structural modelling by simulating a counterfactual merger experiment among pairs of the biggest banks and study-ing the unilateral e¤ect of the mergers on the interest rates. The results provide another evidence that concentration measures (such as Her\u85ndahl index) could be very misleading indicators of market power. JEL Classi\u85cation: G21, L11, L13, Keywords: Demand, discrete choice, product di¤erentiation, banking, market power, merger simulation The views expressed in this paper are those of the authors and do not necessarily correspond t