| Abstract: |
The aim of this study is to provide a methodology for the joint estimation of
efficiency and market power of individual banks. The proposed method utilizes
the separate implications of the new empirical industrial organization and the
stochastic frontier literatures and suggests identification using the local
maximum likelihood (LML) technique. Through LML, estimation of market power of
individual banks becomes feasible, while a number of restrictive theoretical
and empirical assumptions are relaxed. The empirical analysis is carried out
on the basis of EMU and US bank data and the results suggest small differences
in the market power and efficiency levels of banks between the two samples.
Market power estimates indicate fairly competitive conduct in general;
however, heterogeneity in market power estimates is substantial across banks
within each sample. The latter result suggests that while the banking
industries examined are fairly competitive in general, the practice of some
banks deviates from the average behavior, and this finding has important
policy implications. Finally, efficiency and market power present a negative
relationship, which is in line with the so-called “quiet life hypothesis”. |