Abstract
The study evaluates the nature of market structure, and the degree and determinants of market power in the Zimbabwean banking sector during the period 2009-2014. The study employs the Lerner Index approach method to assess the market power of banks. The Lerner Index approach assists in measuring the extent to which a bank has market power to set its price above marginal cost. The study results established that the banking sector operates under monopolistic competition, confirming that banks possess some market power in pricing their products. This is a result of the nature of products sold by the banking sector, which are differentiated but close substitutes. The study found that the market power of banks increased during the period and was derailed by the memorandum of association which was signed between banks and the central bank. The study established that market power is determined by capital adequacy, non-performing loans, liquidity risk, cost income ratio, economic growth, and regulatory interventions. The study recommends that the government should ensure that it puts in place measures that enhance economic growth and should desist from interfering with the operations of market forces.
Highlights
The market power of a bank gives an indication of the level of competition in the banking sector
The study has shown that the banking sector operated under monopolistic competition during the period 2009-2014
The study has shown that competition is explained by capital adequacy, non-performing loans, liquidity risk, cost–income ratio, economic growth, and regulatory interventions
Summary
The market power of a bank gives an indication of the level of competition in the banking sector. It describes the extent to which a bank can set its price above marginal cost. Market power in the banking sector is associated with social loss emanating from higher prices and restricted output. Hicks (1935) terms it the quiet life hypothesis. The hypothesis explains the relationship between market power and efficiency. Hicks argues that monopoly power rules out competition among firms – allows managers to enjoy a quiet life. This means managers have no incentive to be innovative, which reduces efficiency
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