Market power and competition intensity in the Brazilian market of banking loan

Abstract

This paper estimates empirically the effects market power on bank loan supply, disentangling the effects of unilateral market power (specific to each firm), coordinated market power (due to the level of competition in the banking industry) and effects of efficiency gains due to economies of scale. By means of micro data from the Brazilian banking industry for the period from 1999 to 2010, we show that market power is associated to lower levels of bank loan supply. Moreover, we provide evidence that an increase in the market share is associated to a more than proportional increase in bank loans (scale economy effect). This effect is higher when competition is more intense, indicating that the positive effect of larger banks is mitigated by the exercise of market power. Our findings are robust to different measurements of competition, both based on market structure (Herfindahl-Hirschman index) or based on banking conduct, derived from the Panzar and Rosse (1987)’s model.