The oligopoly solution tested

doi:10.1016/0165-1765(88)90013-4

Economics Letters

Volume 28, Issue 4, 1988, Pages 361-364

https://doi.org/10.1016/0165-1765(88)90013-4 Get rights and content

Abstract

Bresnahan's econometric technique for estimating the type of pricing behavior is applied to an early antitrust case. The empirical results are plausible and suggest that it may be appropriate to use this technique in future antitrust cases.

References (8)

Timothy F. Bresnahan
The oligopoly solution concept is identified
Economics Letters
(1982)
Donald L. Alexander
An examination of the linseed oil case
(1988)
J. Durbin
Testing for serial correlation in systems of simultaneous regression equations
Biometrika
(1957)
Milton Friedman et al.
Monetary trends in the United States and the United Kingdom: Their relation to income, prices, and interest rates, 1867–1975
(1982)

There are more references available in the full text version of this article.

Cited by (23)

Banks as 'fat cats': Branching and price decisions in a two-stage model of competition
2012, Journal of Economics and Business
Citation Excerpt :
In order to assess oligopoly conduct, the latest empirical studies mostly employ the so-called ‘new empirical industrial organization’ (NEIO) approach, which relies on non-structural models inferring market power from the observation of firms’ conduct and requiring the estimation of equations based on theoretical frameworks of price and output determination. More specifically, these models aim to test conduct by directly addressing firms’ behaviour through the estimation of a parameter that can be interpreted as a conjectural variation coefficient (Iwata, 1974; Appelbaum, 1979, 1982; Roberts, 1984) or as the deviation of the perceived marginal revenue schedule of a firm in the industry from the demand schedule (Bresnahan, 1982, 1989; Lau, 1982; Alexander, 1988). However, they generally consider only one strategic variable, usually price or quantity.4
In this paper we develop an empirical two-stage model of price competition for the banking industry that incorporates the choice of capacity in the form of new branches. This is achieved by supplementing the customary two-equation framework (demand plus first-order condition in the loan market) with the addition of a third equation that endogenizes the investment decision regarding the branch network. The model is estimated using data on a group of large and medium Italian banks for the years 1995–2009. The results show that the conduct of banks is significantly more competitive than a Bertrand–Nash equilibrium, and support the rejection of the simple one-stage specification, which underestimates the degree of competition. In the taxonomy of Fudenberg and Tirole (1984), the banks in the sample are found to behave as ‘fat cats’, overinvesting in the branch network so as to keep prices high and accommodate entry.
Market power in local banking monopolies
2009, Journal of Banking and Finance
Citation Excerpt :
This has been done in two ways. The first is to estimate a parameter that represents the behavior of firms (and therefore the degree of their market power): it can be interpreted as a conjectural variation coefficient (Iwata, 1974; Appelbaum, 1979, 1982; Roberts, 1984), or as the deviation of the perceived marginal revenue schedule of a firm in the industry from the demand schedule (Bresnahan, 1982, 1989; Lau, 1982; Alexander, 1988). Applications of this technique (and its variants) in banking have been performed by Shaffer (1989, 1993), Berg and Kim (1994), Shaffer and DiSalvo (1994), Coccorese (1998b, 2005), Neven and Roller (1999), Toolsema (2002), Angelini and Cetorelli (2003), Canhoto (2004) and Uchida and Tsutsui (2005).
By means of two NEIO techniques, this paper analyzes the conduct of a group of Italian single-branch banks operating as monopolists in small local areas (municipalities) in the years 1988–2005, in order to assess pricing behavior in highly concentrated banking markets. Both tests strongly reject the hypothesis of pure monopoly pricing: regardless the advantageous condition, these banks are able to exploit only partially their market power, principally by reason of the nearby competition, the latest banking consolidation trend and the local presence of big banks. Employing another sample, we also show that in duopolistic markets the conduct of single-branch banks is virtually competitive.
Banking competition and macroeconomic conditions: A disaggregate analysis
2004, Journal of International Financial Markets, Institutions and Money
Citation Excerpt :
It requires the estimation of a simultaneous-equation model based on aggregate industry data, where a parameter representing the degree of market power of firms is included. Empirical implementations of this technique have been performed by Alexander (1988), Shaffer (1989, 1993), Coccorese (1998b) and Bikker and Haaf (2002) particularly, the last three authors have applied this method within a banking context. The Rosse and Panzar test often has a clear interpretation when applied to the study of markets, given that H represents the percentage variation of the equilibrium revenue derived from a unit percent increase in the price of all factors used by the firm.
In this paper, we aim to assess the competitive conditions in the Italian banking industry in the years 1997–1999, both nationwide and in the standard four macro-regions within the country (North-West, North-East, Center, South and Islands), by employing the Rosse–Panzar H-statistic. The empirical results confirm that Italian banks earn revenues as if they were under conditions of monopolistic competition. They also show that there is a positive relationship between the local economic performance and the degree of competition among banks, given that they appear to behave as perfectly competitive firms where local macroeconomic data reveal lower unemployment rates, greater per capita GDP and lower market loan rates.
Banking conduct before the European single banking license: A cross-country comparison
2001, North American Journal of Economics and Finance
Citation Excerpt :
The total number of observations was 172, equal to one observation per country for each year in which the respective country is included (13 observations each for Japan, Norway, Spain, Sweden, the U.K., and the U.S.; 12 observations each for Belgium, Denmark, Finland, Italy, and Switzerland; 10 each for France and Portugal; 8 for Canada; and 6 for Germany). This total considerably exceeds the number of observations used in several other recent studies of conduct: Alexander (1988) and Shaffer (1993a) apply similar tests to samples of 22 and 25 observations, respectively, while the Canadian trust company and mortgage company samples of Nathan and Neave (1989) contain 39 and 33 observations, respectively. Factors unique to each nation might lead us to expect a higher or lower degree of contestability in particular cases.
This paper estimates conduct and excess capacity of the banking industry in 15 industrialized countries in North America, Europe, and Asia during 1979–91. Significant market power was found in five countries and excess capacity was indicated in one country. The estimates were consistent with either contestability or Cournot oligopoly in most of these countries, while five countries were significantly more competitive than Cournot.
Testing for market power using a dynamic oligopoly model
1999, International Journal of Industrial Organization
We propose a dynamic reformulation of the oligopoly model of Bresnahan (1982) and Lau (1982) in an error correcting framework. This reformulation addresses both statistical problems generated by short run dynamics in the data and incorporates important dynamic factors such as habit formation from the demand side and adjustment costs for the producer. We also propose a test for separability of the variables involved in the identification of the market power parameter. To illustrate the model, the French market for fresh salmon is analysed. The results suggest the salmon market to be competitive in the long run, but indicate that the largest producer, Norway, has some market power in the short run.
Conduct in a banking duopoly
1994, Journal of Banking and Finance

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The oligopoly solution tested

Abstract

Economics Letters

An examination of the linseed oil case

Testing for serial correlation in systems of simultaneous regression equations

Biometrika

Monetary trends in the United States and the United Kingdom: Their relation to income, prices, and interest rates, 1867–1975