New insight into market concentration and competition: Use of Barnett’s variable profit function to measure market structure in banking

Article type: Research Article

Authors: Hasan, Fatima

Affiliations: College of Business, Eastern Kentucky University, Richmond, KY, USA | E-mail: fatima.hasan@eku.edu

Correspondence: [*] Corresponding author: College of Business, Eastern Kentucky University, Richmond, KY, USA. E-mail: fatima.hasan@eku.edu.

Abstract: Previous research on market concentration in banking is heavily tilted towards using deposits as the underlying variable for measuring market concentration. This paper proposes a change in methodology by replacing deposits with the Variable profit function based on Barnett and Hahm’s Economic model for Financial Institutions, used in their 1994 paper. This model has also been successfully used in Dr. William A. Barnett’s successive research. Hancock 1997 also proposes using a similar methodology for modelling banks as Economic firms. Results change dramatically once deposits are substituted by variable profits, and a confounding puzzle is solved, involving one of South Asia’s thriving banking markets.

Keywords: Market concentration, banking, market structure, new methodology, productivity

DOI: 10.3233/JEM-210475

Journal: Journal of Economic and Social Measurement, vol. 45, no. 2, pp. 171-182, 2020