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The Panzar–Rosse revenue test and market power in banking: an empirical illustration

In: Handbook of Competition in Banking and Finance

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  • Sherrill Shaffer
  • Laura Spierdijk

Abstract

Although the theoretical literature has shown that the Panzar–Rosse H-statistic fails as a measure of market power, it is still a widely used statistic in empirical banking studies. Such studies still rely on the erroneous belief that H > 0 is inconsistent with significant market power. This chapter provides empirical evidence against the latter belief by analyzing a US banking duopoly. We find “competitive†estimates of H but, consistent with a priori expectations, non-competitive outcomes according to an alternate measure of competition, the Lerner index. Moreover, our bank-specific estimates of H are mutually inconsistent, suggesting additional problems with the Panzar–Rosse test.

Suggested Citation

  • Sherrill Shaffer & Laura Spierdijk, 2017. "The Panzar–Rosse revenue test and market power in banking: an empirical illustration," Chapters, in: Jacob A. Bikker & Laura Spierdijk (ed.), Handbook of Competition in Banking and Finance, chapter 2, pages 27-45, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:16878_2
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    Cited by:

    1. Canta, Chiara & Nilsen, Øivind A. & Ulsaker, Simen A., 2023. "Competition and risk taking in local bank markets: Evidence from the business loans segment," Journal of Empirical Finance, Elsevier, vol. 73(C), pages 153-169.
    2. Iryna Okolelova & Jacob A. Bikker, 2022. "The single supervisory mechanism: Competitive implications for the banking sectors in the euro area," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 1818-1835, April.
    3. Cruz-García, Paula & Fernández de Guevara, Juan & Maudos, Joaquín, 2021. "Bank competition and multimarket contact intensity," Journal of International Money and Finance, Elsevier, vol. 113(C).

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    Economics and Finance;

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