Multi-Product Competition In The Banking Industry

Economists are divided on the issue whether banking competition is valuable and benefits consumers or whether it is harmful and pushes banks into excessively risky activities. This theoretical debate has gained even more importance after the recent banking crises. To test these theories empirically, however, one must first identify the level of competition in the banking sector. Reduced form, nonstructural models (conjectural variation, Panzar and Rosse, 1987 test) all have their problems and cannot identify reliably the level of competition. The theoretical and applied literature has paid little attention to the competitive effects of multi-product operations in banking industry. These institutions may be defined as entities that offer financial,

Allen and Rai (1996), for instance, estimate economies of scale and scope in financial conglomerates by investigating countries with and without universal banks. Vander Vennet (2002) empirically analyzes the cost and profit efficiency of European financial conglomerates and universal banks. However, the only research that has addressed the effects of multi-product operations on banking competition is that of Berg and Kim (1998). This article aims to empirically fill the gap in the literature on the relationship between multi-production operations and competition by studying the effects of a multi-product structure on the patterns of competition in the banking sector. The operating costs of multi-product banks should be lower than those of specialized banks if integration allows for the realization of operational synergy. In addition, these institutions may exhibit superior performance if informational or other advantages produce positive spillovers to the traditional and non-traditional banking activities that these banks undertake. Because multiproduct operations can significantly change a bank’s cost structure, it may also have a significant effect on banking competition. In this paper, we examine the behavior and conduct of

Vander Vennet (2002) empirically analyzes the cost and profit efficiency of European financial conglomerates and universal banks. However, the only research that has addressed the effects of multi-product operations on banking competition is that of Berger and Kim (1994). Berger and Kim analyze the behavior of banks operating simultaneously in the retail and corporate banking loan segments. The results revealed asymmetries in the degree of competition, which may be related to the characteristics of the consumers in each of these segments. Although important, Berger and Kim’s article is essentially descriptive and does not investigate the possible relationship between multi-production operations in banking conglomerates and competition. This paper applied Panzar and Rosse’s (1987) model to derive an empirical model that explicitly analyzes the behavior and conduct of a representative multi-product bank that enjoys economies of scope in supplying classic and other banking products. Similarly, Barbosa, et al (2014) examined the degree of competition in the Brazilian banking sector over the period 2001 to 2012. Our result, in this paper, confirms this study on the Brazilian banks. The remainder of this paper is organized as follows. Section 2 briefly explains the data and methodology employed in this study. Section 3