Market Structure and Competition among Retail Depository Institutions

Abstract

We assess competition among retail depository institutions in 1,884 rural markets. We estimate an equilibrium market structure model that endogenizes the operating decisions of three types of depository institutions: multimarket banks, single-market banks, and thrift institutions. Observed market structures and a game-theoretic specification of entry behavior identify the parameters of an underlying profit function. We find strong evidence that product differentiation generates additional profits for retail depository institutions. These profits help to maintain smaller banks and thrifts, even as larger banks expand their operations. Consumers have more options, as more institutions can profitably operate as a result of product differentiation. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Investment Strategies and Market Structure: An Empirical Analysis of Bank Branching Decisions

“…Once computed, we insert these correction terms into (1) to offset any correlation between μ j,m and N * m and thereby obtain unbiased estimates of g and f. 10 The market structure model follows the approach of the empirical entry literature developed by Bresnahan and Reiss (1991) and Berry (1992). Specifically, as in Cohen and Mazzeo (2007), market structure is represented by an ordered triple (M, S, T) that represents the number of multimarket banks (M), single-market banks (S), and thrifts (T) that are operating. Within each institution type, firms are assumed to be homogeneous and make decisions on whether to operate based on a latent payoff function of the form:…”

“…18 In our estimation of the endogenous market structure model we have collapsed the distribution of markets from above for each of the three categories-that is, all markets with three or more thrifts are treated as if they have at least three, all markets with four or more single-market banks are treated as if they have at least four, and all markets with six or more multimarket banks are treated as if they have at least six. This reduces the complexity of the estimation without appreciably influencing the results; see Cohen and Mazzeo (2007). 19 Distinguishing between single-market and multimarket bank types has a tradition in the literature (see Cohen and Mazzeo (2007) and the references therein); we choose to employ this distinction because it is very clearly reflects an endogenous decision made by banks.…”

“…This reduces the complexity of the estimation without appreciably influencing the results; see Cohen and Mazzeo (2007). 19 Distinguishing between single-market and multimarket bank types has a tradition in the literature (see Cohen and Mazzeo (2007) and the references therein); we choose to employ this distinction because it is very clearly reflects an endogenous decision made by banks. However, categorizing banks by an outcome variable such as size does have some conceptual appeal, as theories of differentiation in lending and funding behavior often relate to bank size.…”

Explaining the Credit Union Entry Decision, and Implications for Performance

“…Amel and Hannan (2000) argued for a very narrow market definition around banks, suggesting that neither thrift institutions nor credit unions directly compete with them; and most studies taking a broader view of financial market competition (e.g., Cohen and Mazzeo 2007a) tend to exclude credit unions from consideration. On the other hand, Feinberg (2001Feinberg ( , 2002 provided some evidence that credit unions-at least in rural and small metropolitan area markets-do provide some competitive discipline to bank pricing.…”

“…Cohen and Mazzeo (2007a) is a structural study of entry and competitive effects in local financial services markets with an emphasis on different impacts of multi-market banks, single-market banks, and thrift institutions (they do not study credit unions). Their intuitively appealing result is that institutions of the same type are more closely competitive than are those of different types.…”