This paper examines banking competition in Florida by measuring and comparing the Hirschman-Herfindahl Index (HHI), critical mass, and several other competition measures.
First, the model and resulting competition measure calculations are explained. Second, the model is applied to banks in Florida and the results are given. Third, the results are discussed and the paper is concluded. Previous research showed that using the HHI in market power models can lead to erroneous results, a new measure was introduced: the critical mass.
The results for the HHI and the C3 ratio’s lead to the conclusion that there is a low concentration in the market, while the results for the critical mass show that all banks in the market have power and that the market is highly concentrated. These conflicting results cannot be completely explained by changes of key variables over time. An extension of the data set with more recent data is needed to determine which concentration measure is right.
Table of Contents
1. Introduction
2. The model
3. Results
3.1. Descriptives and the HHI
3.2. Critical mass
3.3. Time analysis
4. Conclusion
Research Objectives and Topics
This paper aims to evaluate the effectiveness of the Hirschman-Herfindahl Index (HHI) for measuring market concentration in the banking sector and to compare it against the alternative "critical mass" measure to identify potential biases and errors in existing market power estimations.
- Comparison of traditional concentration measures like HHI and C3 ratios versus the critical mass model.
- Identification of omitted variable and aggregation biases in empirical market power estimations.
- Analysis of the Florida banking market data spanning from 1984 to 2004.
- Investigation into the impact of market share, conjectural variation, and firm costs on bank competition.
- Evaluation of how regulatory bodies like the US Department of Justice could improve merger scrutiny using refined metrics.
Excerpt from the Book
3.2. Critical mass
The critical mass was calculated for the full sample and four separate time periods using specification (4); the results are displayed in Table 2. In general it can be seen that the conjectural variation has the highest impact on the Lerner index and that the effect of the other variables is almost negligible. Over the full sample the critical mass is negative, so it is effectively zero, meaning that all firms have market power (θ* > θmin). This is in stark contrast to the results in the previous section, but it might be explained when looking at the separate time periods.
The last row of Table 2 show the critical mass over time. In the first half of the sample (1988-1995) the critical mass was positive while it became negative in the second half (1996-2004). In the early years the critical mass was even highly positive, a bank had to get a market share above 80 percent in order to gain market power. None of the banks actually had such a high market share, so θmax < θ*. Because of the lags in the specification the critical mass before 1988 was not calculated but it could be close or even higher than the critical mass that was estimated for the first time period. Note that the descriptive statistics, the HHI, and the C3 ratio, were calculated for the full sample (1984-2004), so it is possible that the results differ because of these sample differences. The highly positive critical mass in the earlier time periods is consistent with the conclusions drawn from the HHI and the C3 ratio.
Summary of Chapters
1. Introduction: Introduces the Hirschman-Herfindahl Index (HHI) as a common market concentration measure and highlights its critiques regarding measurement errors and lack of dynamic competition aspects.
2. The model: Details the mathematical framework for calculating the critical mass measure as an alternative to HHI to solve for omitted variable and aggregation biases.
3. Results: Presents an empirical analysis of Florida banking data from 1984-2004, comparing descriptive statistics, HHI, C3 ratios, and critical mass findings across different time periods.
3.1. Descriptives and the HHI: Provides an overview of variable means and standard deviations, concluding that traditional measures suggest a low concentration in the Florida banking market.
3.2. Critical mass: Examines the critical mass results, noting a shift from positive values in early years to negative values in the latter half of the sample.
3.3. Time analysis: Explores the longitudinal trends of key variables to determine if changes over time explain the conflicting conclusions between different concentration measures.
4. Conclusion: Summarizes the findings and suggests that the critical mass measure provides a more robust framework for evaluating market power, potentially benefiting regulatory decision-making.
Keywords
Banking Competition, Market Concentration, Hirschman-Herfindahl Index, Critical Mass, Lerner Index, Conjectural Variation, Florida Banking Market, Market Power, Merger Guidelines, Empirical Estimation, Omitted Variable Bias, Aggregation Bias, Competition Measures, Economic Regulation, Industrial Structure.
Frequently Asked Questions
What is the primary focus of this research paper?
The paper evaluates whether the Hirschman-Herfindahl Index (HHI) is an accurate measure of market concentration and proposes the "critical mass" measure as a superior alternative to mitigate biases in market power models.
Which specific industry and region does the study examine?
The study focuses on the banking industry within the state of Florida, utilizing data from FDIC call reports between 1984 and 2004.
What is the main research question or objective?
The objective is to determine if the conflicting results between traditional concentration measures (HHI and C3) and the critical mass measure can be explained by dynamic variables and to assess which measure provides a more accurate reflection of market power.
What scientific method is employed in the analysis?
The author uses empirical estimation techniques, specifically applying the Cowling and Waterson (1976) model to estimate the Lerner index and critical mass, while accounting for endogeneity using first differences.
What subjects are covered in the main body of the paper?
The main body covers the theoretical derivation of the critical mass model, the statistical description of the banking market, and a longitudinal analysis of how concentration measures behave over different time periods.
What are the key terms that characterize this work?
Key terms include Hirschman-Herfindahl Index, Critical Mass, Lerner Index, Conjectural Variation, Market Power, and Banking Competition.
Why does the author argue that the HHI is biased?
The author, referencing Bos et al., argues that the HHI rests on underlying assumptions that lead to omitted variable bias and aggregation bias when used in market power models.
How does the "critical mass" measure differ from the HHI?
Unlike the HHI, which is a static calculation of squared market shares, the critical mass measure incorporates conjectural variation and dynamic reallocations to define the threshold at which firms transition into an oligopoly.
What did the longitudinal analysis reveal about the Florida banking market?
The analysis showed that while traditional measures consistently suggested low market concentration, the critical mass measure yielded different results depending on the time period, highlighting the complexity of market power over time.
- Citar trabajo
- Colin Tissen (Autor), 2017, Examining Bank Competition in Florida. Using Critical Mass as an Improved Competition Measure, Múnich, GRIN Verlag, https://www.grin.com/document/376746
