Measuring Market Power in Input and Output Markets: An Empirical Application to Banking

Abstract

This paper develops and estimates a model of market conduct in the US banking industry during the 1990s. Competition in both output and factor markets is measured in a static Cournot model in the spirit of Bresnahan (1989), Shaffer (1991,1994a), Neven and Roeller (1997), and others. Banks can exert market power in loans as well as in deposit markets. Previous studies on banking competition center on the structure conduct hypothesis, where reduced form models with market concentration measures are used to estimate the degree of competition. We consider a disaggregated structural model of bank loan markets, where bank's competitive behavior is measured in input and output markets. Our results indicate that the standard model which measures only output market behavior is potentially biased.