Working Paper

Market structure and quality: an application to the banking industry

Abstract: This paper presents empirical evidence consistent with the predictions of the endogenous sunk cost model of Sutton (1991), with an application to banks. In particular, banking markets remain concentrated regardless of market size. Given an asymmetric oligopoly where dominant and fringe firms coexist, the number of dominant banks remains unchanged with market size, with only the number of fringe banks varying across markets. Such structure is sustained by competitive investments in quality, with the level of quality increasing with market size and dominant banks providing higher quality than fringe banks. The analysis has implications for antitrust policy.

Keywords: Banking market; Banking structure;

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2003

Number: 2003-14