Abstract
This study separates market-power effect from that of cost-efficiency effect of changes in industrial concentration and investigates their impact on output price in the Indonesian banking sector. The conduct parameter and market elasticity are also estimated in this research. This research uses the data of banks from the Indonesia Financial Services Authority (OJK) for the period from 2005 to 2016. The generalised method of moment (GMM) is applied to estimate the market power and the cost efficiency effects based on the industry-supply model and the demand equation. This research reveals that the market-power effect combined with the cost-inefficiency effect increase the output price when the industrial concentration increases. This suggests that policy makers evaluate the consolidation of the banks that may increase the industrial concentration.
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