Market Concentration and Uniform Pricing: Evidence from Bank Mergers

João Granja and Nuno Miguel Marques da Paixao

Staff Working Papers from Bank of Canada

Abstract: We show that U.S. banks price deposits almost uniformly across their branches and that this pricing practice is crucial to explain the deposit rate dynamics following bank mergers. We find a strong and sharp post-merger convergence between the deposit rates of the acquired branches and the median deposit rate of the acquirer. This pattern is almost fully explained by adjustments in the deposit rates of the acquired branches, irrespective of whether their rates were above or below those practiced by the acquirer. Acquired branches lose deposits and local market share, especially when they decrease their rates due to uniform pricing. Local competitors respond to changes in deposit rates at the acquired branches by adjusting their own deposit rates in the same direction. We find that pre-merger differences in deposit rates between merged entities explain more of the post-merger evolution of deposit rates than the predicted changes in local market concentration induced by the merger. This result indicates that competition authorities would be well advised to review the potential impact of pre-merger pricing differences in evaluating a merger within an industry with strong uniform pricing practices.

Keywords: Financial institutions; Financial system regulation and policies; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: D4 G34 L11 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2021-02
New Economics Papers: this item is included in nep-com and nep-ind
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