MARKET STRUCTURE AND INTENSITY OF PRICE COMPETITION IN EU BANKING

Abstract

This article analyzes both determinants of market structure and the intensity of price competition in the European Union (EU) banking industry. For this purpose, the first part of the article applies John Sutton's framework for empirically measuring the relationship between market size and market concentration. Next, the analysis turns to assessing the degree of price competition by applying a method of measuring banking competition that I have recently developed. Results suggest that there is a null relationship between market size and concentration, and that the estimated lower bound to concentration is well above zero. These two pieces of empirical evidence support Sutton's endogenous sunk costs model. Moreover, empirical estimates of a measure of competition—distance to the lower bound to concentration—suggest that the majority of EU national banking markets have low intensity of price competition. In contrast, Estonia, Netherlands, Finland, and Lithuania appear to have the most competitive banking industries.