The Panzar-Rosse Revenue Test and Market Power in Banking

The Panzar–Rosse H statistic is a commonly used measure of market power in banking. It is widely believed that H>0 is inconsistent with significant market power. This study rigorously disproves that perception. Instead, the possibility of H>0 under conditions of substantial market power turns out robust to the timing of banks’ actions, relative costs, choice of strategic variable, degree of product differentiation, strategy (static or dynamic), and degree of heterogeneity in banks’ conduct (collusive versus fringe), and hence may be common in practice.