Concentration and Geographic Proximity in Antitrust Policy: Evidence from Bank Mergers

Market concentration (HHI) based antitrust policy can be vulnerable to mismeasurement of substitutability. We provide evidence demonstrating this vulnerability in the banking industry, and argue that HHI-based bank antitrust review can be improved by incorporating a determinant of substitutability between merging banks: the proximity of their branch networks. Using difference-in-differences to estimate the effects of bank mergers, we find that mergers of close-proximity banks lead to more branch closures and to repositioning that is less beneficial for consumer access. Moreover, although rivals offer worse interest rates (prices) after close-proximity mergers, the merging parties' deposit growth (quantity) declines. These results hold for transactions that evade HHI-based enforcement criteria. Our findings also inform antitrust policy for other industries where firms’ locations are an important and observable determinant of substitutability.