Improving Market Power Tests: Does it matter for the Dutch Banking Market?

J.W.B. Bos

Research Series Supervision (discontinued) from Netherlands Central Bank, Directorate Supervision

Abstract: In this paper, I investigate whether improving the traditional SCP model gives additional insights in the existence of market power in the Dutch banking market. I first improve the measurement of market structure. Then, I introduce a simple Cournot-model, which results in a more flexible measure of market power for different market structures. Finally, I include the Efficiency hypothesis and modify it to more accurately test it jointly with the market power tests. Theoretically speaking, the Cournot model provides a better test for the existence of market power than the SCP model. Likewise, explicitly correcting for and including efficiency results in a more correct test of the Efficiency hypothesis. Empirical results confirm that the introduced improvements based on the Cournot models are the only ones resulting in tests that are consistent with the underlying models. Evidence from the Cournot model suggests that we cannot reject the existence of market power, although its impact on performance may be small. It also formalizes the need for additional research into the importance of strategic interaction among banks.

Keywords: SCP hypothesis; efficiency hypothesis; cournot; x-efficiency (search for similar items in EconPapers)
JEL-codes: G21 L11 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eff and nep-fin
Date: 2003-04
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:ressup:56

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