Abstract
This paper uses a direct measure of efficiency to examine the relationship between market structure and the performance of brokerage houses in Turkey. This methodology involves two stages: First, a stochastic translog cost frontier is specified to obtain a direct measure of efficiency. Second, this measure is included in a profitability equation along with market concentration and market share variables. These two equations are then estimated using quarterly data from 112 brokerage houses for the period 2008–2015. The results show that the efficiency of brokerage houses does not influence profitability when measured directly. Market share, on the other hand, is found to be one of the main determinants of profitability, providing support for the relative market power hypothesis.
Highlights
Numerous studies have investigated the factors influencing firm profitability
In column (A), we report the fixed-effects (FE) estimates of Equation (8) without a direct measure of efficiency, which is the most commonly used specification in the literature to test the hypotheses on the relationship between market power and performance
This paper tests the hypotheses concerning the relationship between market structure and performance by using a direct measure of efficiency for the brokerage houses operating in Turkish capital markets
Summary
Numerous studies have investigated the factors influencing firm profitability. These studies have generally found a positive relationship between market concentration and performance. The relative market power (RMP) hypothesis argues that firms with large market shares might use their power to determine prices and make profits. It is aimed to examine the relationship between market structure and profitability of brokerage houses in Turkey using a direct measure of efficiency. The results of the paper suggest that the relative market power hypothesis is strongly supported in the Turkish brokerage house sector when efficiency is measured directly. The brokerage houses with large market shares seem to use their market power to determine prices and make profits during the period under study. The structure of the paper is as follows: Section 2 provides background information on Turkish capital markets and the development of brokerage houses in the sector.
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