Development of a model of price competition in the Spanish loans market

Abstract

PurposeThe main objective of this paper is to propose a model that allows the detection of the competitive pattern of the Spanish loans market between 1992 and 1996.Design/methodology/approachIn order to achieve this objective, the paper estimates, following the New Empirical Industrial Organization paradigm, a conjectural variation model for the strategic marketing dimension of price. The model proposed allows the measurement of strategic group‐level rivalry while simultaneously considering demand, costs, and profit specifications for each bank.FindingsThe findings evidence a high degree of competition between the firms within the same strategic group. Further, the demand for loans of a firm has a positive (negative) relationship with the rivals' price (own price), with the own branch network (rivals' branch network), and with the economic activity in the regions where firm operates.Research limitations/implicationsThe major limitation of this research could become from the necessity to operate with detailed information that the authors try to overcome using proxies of several non‐available variables.Originality/valueThe model proposed herein represents a contribution to previous works and also provides more information about banking competition in the sense that it estimates price competition between firms within three strategic groups.