The Effects of Past Entry, Market Consolidation, and Expansion by Incumbents on the Probability of Entry

Abstract

The threat of entry is an important factor in the evaluation of the potential competitive effects of proposed mergers and acquisitions. In the evaluation of proposed bank mergers, a high probability of entry, or strong potential competition, is often found to mitigate the potential anticompetitive effect of a proposed horizontal merger. Since the probability of entry is not directly observed for each local market, variables such as income and population growth and past entry are typically used to predict the probability of future entry. This study extends previous research on the determinants of entry into local banking markets. In addition to variables considered by past research, such as market demographic characteristics, branching deregulation and past merger activity, this study considers the effects on future entry of strategic barriers to entry, which are proxied by changes in incumbent branching, the presence of small incumbent firms and market concentration. The analysis uses data that allow a broader definition of entry than that used in most past research. In most of the previous studies, bank entry is defined as the creation of a new banking institution. We show that this definition is problematic and misses all of the entry due to branch network extension by existing banks, which is substantial. Results of our analysis are consistent with past research where past research exists. In addition, we find significant negative relationships between strategic barriers to entry and entry. Assessment of the quantitative significance of the results, however, finds that very large changes in the explanatory variables are needed to cause substantial changes in the probability of entry into banking markets.

Market Structure after Horizontal Mergers: Evidence from the Banking Industry

“…3 We are also able to explore the role of entry after mergers with significant overlap by considering the change in the number of competitors after such mergers. Our analysis of the number of competitors parallels studies on entry such as Adams and Amel (2007), Berger et al (2004), Keeton (2000), and Seelig and Critchfield (2003). These studies all find a relationship between bank consolidation and subsequent entry.…”

“…See Adams and Amel (2007). 9 The logic for insisting that any offices sold to a third party should be those of the target bank (and not the acquiring bank) is as follows: If the acquirer's branches were sold, many of the customers of that branch might simply switch their accounts back to the acquirer at another of the acquirer's offices (so as to retain their relationship with that bank), and thus the "runoff" of customers might be substantial, making it harder for the third party to compete.…”

An Examination of Entry and Competitive Performance in Rural Banking Markets

“…2 Strictly speaking, while Bresnahan and Reiss (1991) and the literature following typically use the term ''entry'' to describe the topic of analysis, what is really at issue is endogeneity in market structure. 3 Adams and Amel (2007) present further results on bank entry, also finding past entry to induce future entry, and provide a nice review of the previous bank entry literature.…”

Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

“…More recently, Berger and Dick (2007) identify an early mover entry advantage in the data of 10,000 U.S. banks in local retail markets. Similarly, Adams and Amel (2007) find that moderate changes in market conditions do not increase the likelihood of entry in retail banking. Despite these barriers to entry, the banking sector in many countries is strictly regulated, and often obtaining a license is prerequisite for operating as a bank.…”