| Abstract: |
Over the past few decades, the worldwide banking industry has undergone strong
consolidation. As a result, the number of banks has fallen sharply. At the
same time, the size of the largest banks has increased substantially, both in
absolute figures and relative to the size of smaller banks. This paper
analyzes the impact of this development on competition by assessing the
relation between bank size and market power. We use an extended version of the
Panzar-Rosse (P-R) model that allows bank size to affect market power. Based
on a large sample of more than 18,000 banks in 101 countries comprising more
than 112,000 bank-year observations, we show that market power varies with
bank size. Large banks have substantially more market power than small banks
in many of the countries under consideration, including the world's major
economies and covering more than 85% of all banks in our sample. Our results
contradict the common finding in the empirical P-R literature that competition
increases with bank size. We show that misspecification of the P-R model in
the existing literature leads to wrong assessment of the relation between
market power and bank size. |