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A new way to estimate market power in banking

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  • Hirofumi Fukuyama
  • Yong Tan

Abstract

Market power in banking is very important to increase a bank’s competitive power. The investigation of this is of particular relevance to the Chinese banking industry in the light of the stability issue experienced by the Chinese commercial banks in 2019. Instead of using translog cost function or semi-parametric method as a component to estimate Lerner index, this study estimates Lerner index based on data envelopment analysis. The results show that joint-stock banks have the lowest market power, while although city commercial banks have a higher level of market power than joint-stock commercial banks, it is still lower than the other three ownership types. Overall, the Chinese banking industry experienced a decline in the level of market power from 2010 to 2015, after which there was a slight increase in the level, the market power ended up with a value of 0.937 by the of 2018. We notice that the Chinese banking industry in general has a higher level of market power with the value of Lerner index achieved more than 0.93 for every year of the examined period.

Suggested Citation

  • Hirofumi Fukuyama & Yong Tan, 2022. "A new way to estimate market power in banking," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 73(2), pages 445-453, March.
    • Handle: RePEc:taf:tjorxx:v:73:y:2022:i:2:p:445-453
    DOI: 10.1080/01605682.2020.1824555
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    Cited by:

    1. Fukuyama, Hirofumi & Matousek, Roman & Tzeremes, Nickolaos G., 2023. "Estimating the degree of firms’ input market power via data envelopment analysis: Evidence from the global biotechnology and pharmaceutical industry," European Journal of Operational Research, Elsevier, vol. 305(2), pages 946-960.
    2. Pedro Moskovics & Peter Wanke & Yong Tan & Ali Meftah Gerged, 2024. "Market structure, ESG performance, and corporate efficiency: Insights from Brazilian publicly traded companies," Business Strategy and the Environment, Wiley Blackwell, vol. 33(2), pages 241-262, February.
    3. Fukuyama, Hirofumi & Tsionas, Mike & Tan, Yong, 2024. "The impacts of innovation and trade openness on bank market power: The proposal of a minimum distance cost function approach and a causal structure analysis," European Journal of Operational Research, Elsevier, vol. 312(3), pages 1178-1194.

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