The impact of deregulation on price and non-price competition in the Portuguese deposits market

Abstract

The Portuguese deposits market experienced a pronounced deregulation phase from 1986 to 1992. During that period the situation moved from a highly regulated market in which Government-controlled institutions accounted for more than 90% of the market, to a complete integration into the fully liberalised European Internal Market. This paper studies the evolution of market power and non-price competition during that deregulation process. Using panel data, a system of three equations was estimated representing optimality decisions for deposit rates, advertising expenditures and branches. An important conclusion is that interest rate and entry deregulation were associated with an increase in both price and non-price competition. The small foreign-owned banks were found to have virtually no market power in deposits. On the other hand, although no direct relationship between market power and market share was found, significant market power was detected for the wholesale and banks that existed since before the Revolution. Thus, mergers between large banks are not likely to directly increase market power for the participating firms, although the association found between market power and concentration suggests that such mergers may increase the banking industry’s profits.