Microeconomic modification of an industry-wide Boone indicator: Market power of Russian banks revisited

This paper proposes a modification of an industry-wide banking competition indicator, namely the Boone indicator, which does not require information about the interest rates on loans, as opposed to the more popular Lerner index. In previous research, the Boone indicator was estimated as homogeneous effect of the banks marginal costs on their market shares or profitability. We show that such effect is heterogeneous and that the main sources of bank-level heterogeneity of that effect for Russian banks include differences in business models pursued (retail vs. corporate) and credit risk exposures. Based on these differences we identified more risky and less risky niches on credit market. Bank-level estimates of the Boone indicator showed that government-owned banks hold leading positions in every such niche. Next, based on these estimates we, first, confirm monopolistic nature of credit market with Sberbank being the dominant player. Second, we show that banks compete in this market mainly on quality rather than on quantity. Finally, we show that Boone indicator and the Lerner index provide similar predictions about the market power of Russian banks, despite of their differences.