A new measure of firm-level competition: an application to euro area banks
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Abstract
Key Points:
- Abstract
This paper extends Boone (2008) by introducing a competition measure at the individual
firm level rather than for an entire market segment. - We apply this extended Boone indicator to individual bank-level competition
in the loan market in the four largest euro area countries and Austria. - Our new measure of firm-level competition enriches and complements
other competition measures and provides a promising starting point for future market
power analyses. - The only measure among non-structural measures that is based on the
concept of competition as a process of rivalry is the Boone (2008) indicator. - We introduce
a new performance measure of competition by extending the Boone indicator to the
individual firm level. - Introduction
The ability to reliably measure competition is valuable to researchers, analysts, and
policymakers, especially antitrust authorities, financial supervisors, and central banks. - One broad
category of indicators often used to measure competition are structural competition
measures, such as static concentration measures, and dynamic measures, e.g., entry and
exit rates. - Out of these measures, the only measure based on the
concept of competition as a process of rivalry is the Boone indicator. - This study introduces a new performance measure of competition by extending the
Boone indicator to the individual firm level. - It thus measures the
increase in profits in percent of one percentage point increase in efficiency, with marginal
costs as measure of efficiency. - We extend the theoretical
underpinning of the measurement of competition for the entire market of Boone (2008) by
a new measure of individual firm-level competition. - A concern of the literature is the gap
between the practical application and the theoretical framework of Boone (2008). - We introduce within the same theoretical
framework a new measure of competition on firm level, the MRP. - Our new
measure significantly augments the antitrust evaluative framework by shedding light on
whether a merger results in a less competitive market. - Our novel indicator focuses on
firms? incentives to enhance their relative efficiency, as manifested in the elasticity
between relative profits and efficiency. - However, an inefficient firm that is foreclosed could be more
competitive than the larger efficient firm that relies on its scale economies. - Our new metric of competition unveils
banks? ability to influence their profitability in the short term by cutting costs relative to
their peers. - The new MRP indicator provides the ability to assess the impact
of individual banks? competitiveness on their interest rate-setting behaviour in loan
markets. - Incorporating this information promises a more refined understanding of the impact and
timing of monetary policy rates changes on the real economy. - Section 3 introduces within the Boone
(2008) theoretical framework our new measure of individual firm-level competition,
including the interpretation of the MRP. - Section 4 provides an application of our new
ECB Working Paper Series No 29256
individual firm-level competition measure to the loan market.
- The StructureConduct-Performance paradigm (SCP) provides a traditional framework in the field of
industrial organization for analysing competition behaviour in markets. - Concentrated
markets ease the possibilities to collude implicitly or explicitly and therefore concentrated
markets result in higher prices and profits. - For example, a tougher competition
setup may lead to a reallocation of market shares, potentially forcing some firms to exit
the market. - This approach gives firms? strategic behaviour
central stage and focuses on the strategic interaction on prices and quantities, known as
conjectural variation. - Another measure from
this strand of literature is the H-statistic developed by Panzar and Rosse (1987). - The only competition measure from this performance literature where competition is the
outcome from a process of rivalry is the Boone indicator. - A continuous and monotonically increasing relationship exists between
RPD and the level of competition if firms are ranked by decreasing efficiency. - (2013) compare the Boone indicator with the price-cost margin
and conclude that the profit elasticity is a more reliable measure of competition. - The high
elasticity of profits to efficiency unequivocally indicates that the high market shares and
therefore high profits are due to high efficiency. - A firm that quickly passes changes to the input prices is seen as a price
taker with little market power. - Indicators of competition tend to measure different phenomenon and may provide
conflicting messages, as reported for European banking by Carbo et al. - Application 2: Test the ?quiet life? and related market structure hypotheses using the
MRP as competition or market structure measure. - Data
Our application to individual bank-level competition in the euro area loan market uses
balance sheet and income statement data from the Moody?s Analytics BankFocus for the
calendar years 2013-2020. - As such, most publications
on competition in the euro area includes the largest four member states. - Due to these restrictions the database was reduced to an unbalanced panel of up to 1862
banks (depending on the year) from five euro area countries. - Application 1: Measure bank competition using MRP
Looking at the distribution of the MRP for individual banks (Fig. - A similar finding for the four largest euro area countries as a group is
reported in Carbo et al. - Application 2: Test of market structure hypotheses using MRP
Our new measure of individual-bank competition can be used to test market structure
theories. - Euro area banks? market power,
lending channel and stability: the effects of negative policy rates, European Central Bank
Working Paper, 2790 (February). - A
new approach to measuring competition in the loan markets of the euro area, Applied
Economics, 43 (23), 3155?3167. - Impact of bank competition on the interest rate pass-through in the euro area, Applied
Economics, 45 (11), 1359?1380.