A new measure of firm-level competition: an application to euro area banks

Michiel Van Leuvensteijn, Ivan Huljak and Gabe de Bondt

No 2925, Working Paper Series from European Central Bank

Abstract: This paper extends Boone (2008) by introducing a competition measure at the individual firm level rather than for an entire market segment. It is based on the elasticity between profits and efficiency and called marginal relative profitability (MRP). Its intuition is that when a small change in efficiency derived from marginal costs can cause a large change in profits, a firm exercises pressure on its peers and gains profits. The MRP is embedded in the theoretical framework of Boone and measures competition vis-à-vis other market participants. We apply this extended Boone indicator to individual bank-level competition in the loan market in the four largest euro area countries and Austria. The MRP distribution is skewed to the left and many banks have a MRP below one, indicating that those banks have little incentive to enhance their efficiency to increase their profits. The MRP approach is shown to be a powerful tool to test the efficient-structure, structure-conduct performance, and ‘quiet life’ hypotheses and to detect comparatively weak non-competitive banks. Our new measure of firm-level competition enriches and complements other competition measures and provides a promising starting point for future market power analyses. JEL Classification: D4, L16, G21

Keywords: banks; competition; firm level (search for similar items in EconPapers)
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-com, nep-eec, nep-ind and nep-reg
Note: 337418
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