Bank competition and multimarket contact intensity

Abstract

This paper analyzes the effect of multimarket contact on bank competition. We propose a completely new multimarket contact indicator that not only considers the existence of contacts between banks, but also their intensity, by analyzing the strength–weakness position of banks in terms of branch numbers in comparison to their rivals in the markets where they coincide. We test the new indicator empirically in the context of the Spanish banking sector. The main results suggest a negative relationship between market power and the number of multimarket contacts, rejecting the hypothesis of tacit collusion in the Spanish banking sector. However, the result changes completely when we consider the intensity of the contacts, since there is evidence of collusion among banks. Therefore, in the Spanish banking sector, consolidation of the sector has led to an increase in market power due to the effect of the increase in the dominant position of incumbent banks, although the impact has been very small.