Competition Among Dominant Firms in Concentrated Markets: Evidence from the Italian Banking Industry

Abstract

Conventional models of the industrial organisation theory usually state that in concentrated industries firms have significant market power, and that competition can be easily reduced if the leading firms collude. However, recent theoretical analyses show that strong concentration does not necessarily prevent competition among firms. In this paper we consider the Italian banking industry, where the eight largest firms operate at a national level, manage about a half of total loans, and have a notably larger dimension than the other competitors. We estimate a structural model – formed by a demand equation, a cost equation and a price cost margin equation, the latter containing a behavioural parameter – to assess the market conduct of the largest banks for the period 1988-2000. Our finding is that, in spite of their noteworthy size and significant market share, in these years the largest banks have been characterised by a more competitive conduct than the Cournot outcome: this is in line with the results of the latest literature of the field, for which in the banking industry there is often no conflict between competition and concentration.