Abstract
This chapter investigates the relation between market power and cost efficiency (the quiet life hypothesis), and the two competing hypotheses of the relationship between market power and efficiency as well as market concentration on profitability (Structure Conduct Performance and Efficient Structure) in the Indonesian banking industry from 2002 to 2011. The estimation of efficiency is obtained by using a non-parametric Data Envelopment Analysis (DEA). To capture the equilibrium dynamic of the Indonesian banking industry, the Lerner index method is used to measure the level of competition. Results of this study failed to reject both Structure Conduct Performance hypothesis and Efficient Structure hypothesis, but disapprove the existence of the quiet life hypothesis in the Indonesian banking market.
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