Industrial competition as a limit to banking market power

Carlos Bellon, University of Pennsylvania

Abstract

I propose a new characterization of the relevant economic market for commercial lending. I claim that, due to competition amongst borrowers, banks cannot successfully exercise pricing power over geographical areas or individual firms per se. Banks however, can and do overcharge entire markets (defined as all firms that compete against one another). Based on this framework, I identify an innovative control group of firms unlikely to be affected by bank market power: those that compete across wide geographical areas. Using data from the Survey of Small Business Finances in a difference-in-differences test design, I find that in areas where banks are concentrated, firms that compete mostly within the banks area of influence face systematically higher interest rates than their peers. This effect is statistically and economically significant (60–70 basis points). ^

Subject Area

Economics, Finance|Business Administration, Banking

Recommended Citation

Carlos Bellon, "Industrial competition as a limit to banking market power" (January 1, 2012). Dissertations available from ProQuest. Paper AAI3508969.
http://repository.upenn.edu/dissertations/AAI3508969

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