Bank Market Concentration, Advertising Intensity, Price-Cost Margins, and Costs of Production: An Empirical Approach
Stevens, Jerry Lloyd
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Permalink
https://hdl.handle.net/2142/67667
Description
Title
Bank Market Concentration, Advertising Intensity, Price-Cost Margins, and Costs of Production: An Empirical Approach
Author(s)
Stevens, Jerry Lloyd
Issue Date
1980
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Commerce-Business
Language
eng
Abstract
A large and growing literature on the relationship between local bank market concentration and interest rate performance measures has been established, but the systematic influence of market structure on costs of production, advertising intensity, and profit margins has received little attention. The purpose of this study is to extend the structure-performance framework of industrial organization to include population density as well as market concentration as a structure measure to be considered and to broaden the performance measures to include costs of production, profit margins, and advertising intensity. Specifically, the effects of market concentration and population density on profit margins is established with an analysis of the variation in the profit margin due to the cost component.
A simultaneous system of equations is used to represent the structure, conduct, and performance relationships between market advertising intensity, market concentration, and profit margins. A comparison of ordinary least-squares and two-stage least-squares estimates indicates that the inability to establish a statistically significant relationship between market concentration and profit margins in previous studies may be due to the use of single equation estimation techniques to estimate the structure, conduct, and performance relationships.
The investigation of the variation of production costs for bank markets in response to variation of market concentration is presented in the framework of production functions. Evidence which supports the X-inefficiency hypothesis that there exists a lack of incentives for cost reductions in markets where competition is slack is provided. An important findings is that the empirical support for the X-inefficiency hypothesis is sensitive to the measure of market concentration used.
Some of the statistically significant findings of the study include the following: increased market concentration not only results in higher margins between prices and average costs, but higher levels of prices and average costs as well; a negative relationship exists between advertising intensity and bank market concentration measures; production costs are higher and profit margins are lower in bank markets with higher population density; and average costs of production in a bank market have a positive relationship with the Herfindahl measure of market concentration. The policy implications of these and other findings are outlined in terms of their significance to bank merger policies, restrictions on price competition, and technological innovations in banking.
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