Consolidation, market power and cost economies in the banking industry: empirical evidence from Argentina

Abstract

The Argentine banking industry has experienced increasing consolidation during the last decade. On the one hand, it can be argued that this has resulted from cost economies, perhaps associated with technical change. But on the other, it can also be argued that increased concentration in this industry may allow the exploitation of market power in the input (deposits) and output (loans) markets. These issues are addressed in this study using bank-level data for Argentine retail banks over the period 1993-2000 to estimate a cost-function based model incorporating deposits- and loans-market pricing behaviour. The results provide evidence of market power exploitation in both the markets for loans and deposits but also the presence of significant cost economies. The findings further show an increase in consumers’ surplus and banks’ profits over the period possibly associated to the exploitation of cost economies and technical change which may have counteracted the effect of market power.