Greater Market Power Research Articles

Optimal design of deferred compensation for bank executives under agency conflicts

AbstractWe analyze the optimal design of deferred compensation for bank executives under agency conflicts in a continuous time model with a bank liability structure. Our model demonstrates that a well‐designed deferred compensation contract can effectively mitigate bank executives' asset substitution problem and significantly enhance the total value of the bank, which aligns with existing empirical studies. Moreover, we find that the motivation for bank executives to shift risk under deferred compensation is diminished when supervision is more stringent, the bank has greater market power, or the write‐down ratio of debt is lower.

Exposure to superstar firms and financial distress

AbstractA few highly successful firms (“superstar firms”) have captured large market shares and earned massive profits in recent decades. We examine whether superstar firms are associated with a greater likelihood of financial distress for firms exposed to them in product markets. Building on recent research, we identify superstars as firms with the highest markups in the industry and whose industry markup share increases over time. We then measure, with product similarity scores, a firm’s overall product market exposure to superstars. We document that firms with greater exposure are more likely to file for bankruptcy. We examine why superstar exposure is associated with bankruptcy and show that firms with the greater superstar exposure exhibit weaker financial performance and greater riskiness. Furthermore, we show that the association between superstar exposure and the likelihood of bankruptcy strengthens when superstars have greater market power.

The impact of inflation on bank stability: evidence from the MENA banks

PurposeSerious concerns about the stability of the international financial systems have arisen recently, resulting from the mounting inflation rates and the accompanying procedures to control them. Consequently, this study aims at examining empirically the impact of inflationary pressures/shocks on the stability of banking sectors.Design/methodology/approachThe study adopts a dynamic GMM models and exploits a sample of 188 banks operating in 14 MENA economies, over the period 1999–2021.FindingsThis research finds that high inflation does indeed harm bank financial stability and deteriorates banks credit risk. Furthermore, the examination of the impact of interaction terms between inflation and bank-specific and institutional quality variables shows that better capitalisation levels, higher liquidity buffers, larger asset size, greater market power, foreign ownership and overall political stability, all can counterbalance the impact of inflationary pressures on MENA banks financial stability.Originality/valueIn addition to empirically revealing how inflationary shocks can deteriorate financial stability, the main novelty of this research is examining how the interactions between inflation on one hand, and bank-specific and institutional quality on the other, affect bank stability.

Competition, regulation, and systemic risk in dual banking systems

This study investigates the impact of competition and banking regulation on the systemic risk of Islamic Banks (IBs) and Conventional Banks (CBs). Utilizing a random effects panel model with robust errors and an unbalanced panel data set encompassing 80 IBs and 204 CBs from 17 emerging market countries spanning 2000 to 2019, we show that the lack of competition increases systemic risk exposure, which may stem from the interconnection channels and the individual bank risk contributions. Interestingly, this effect is not significantly different between IBs and CBs. Our results also reveal a non-linear relationship between competition and systemic risk. Specifically, greater competition leads to increased systemic stability, but beyond a certain threshold, higher competition exacerbates banks' systemic risk. Additionally, we find that larger banks are more vulnerable to systemic risk, and the lack of competition worsens this vulnerability. We also show that banks with greater market power after the GFC are more exposed to systemic risk.

Horizontal Mergers and Supplier Power

Supplier market power—such as the ability of branded goods suppliers to dictate terms to retailers—is an important feature of many markets. We show that supplier power can counteract the effects of downstream mergers on consumer prices where there are two-part contracts. This is because greater market power allows suppliers to set contracts that internalise partially the impact of the merger on downstream prices. Post-merger, the supplier reduces the per-unit price at which it supplies the merged downstream firms, with the aim of maintaining total industry profitability—and then recoups the profits via a larger fixed fee. We modify the standard upward pricing pressure (UPP) formula to account for the supplier’s response to a horizontal merger in the downstream market, while preserving much of the simplicity of the standard approach.

Bank market power and financial reporting quality

Joining the debate on the banking sector's impact on the real economy, this study examines the impact of banks' market power on local businesses' financial reporting quality. Based on the market power hypothesis and the information-based hypothesis, we propose four ways the banking market could affect the financial reporting quality. The proposed mechanisms suggest that borrowers and bank lenders face increased market power by implementing different earnings management and monitoring practices. Our documentary evidence suggests that since the banking market deregulation, restrictions on inter- and intra-state banking and branching have been removed, with banks gaining more power and the market becoming more consolidated. Using a large sample of U.S. listed firms from 1995 to 2019, we find a favourable impact of bank market power on corporate financial reporting quality, primarily driven by heightened monitoring by banks with greater market power, supporting the monitoring-stringent conjecture. In addition, this positive relationship is more pronounced among firms heavily reliant on local banks. Our results are robust to a rich set of tests, such as using alternative measurements for financial reporting quality and bank market power, including macroeconomic factors, and considering drastic changes in the bank market structure. We also address the endogeneity concerns and test the robustness of our key findings in a loan syndication setting. Our research suggests that facing increased bank market concentration and power, firms must pay additional attention to their financial reporting, which is widely used to access external finance.

A model of greedflation

I present a model where desired markups increase with the volatility of the general price level. Confronted with a change in the price of a good, consumers solve a signal extraction problem to infer the good’s relative price. Yet general price volatility obscures price signals, and consumers attribute part of any price change to variation in the price level. This confers firms with greater market power, which in turn raises the aggregate profit share and magnifies inflationary shocks. These predictions are in line with recent empirical evidence.

Internationalization and digitalization: Their differing role on grocer and non-grocer retailer performance

This study investigates the interplay between two critical phenomena in retailing, i.e., internationalization and digitalization, while accounting for retail sector differences. On one hand, internationalization allows retailers to access a wider range of markets, and on the other, digital channel expansion enhances customer reach and convenience within international markets. More specifically, we examine the relationship between retailer internationalization and performance (I-P relationship), and how this relationship is contingent upon the idiosyncrasies of retail sectors (i.e., grocery vs. non-grocery), digitalization, and their combined effects. Building on the liability of foreignness perspective, we first argue that the I-P relationship is U-shaped, because internationalizing retailers initially incur greater costs in their international expansion owing to their unfamiliarity with foreign markets, but as their foreign presence increases, they benefit from greater market power, experience, and scale economies. Then, we contend that as grocers suffer from higher levels of liability of foreignness due to increased requirements for host country embeddedness, non-grocers benefit more from internationalization with any gains and losses further amplified by digitalization. Hypotheses are tested against a panel of the 234 largest international retailers in the world over a 21-year period (1997–2017) and findings support the conjectures.

The product market power of major customer firms and their suppliers’ performance

ABSTRACT We find that when a major customer has greater market power in its industry, its supplier firm exhibits better performance. The effect of the major customer’s market power on its supplier’s performance is more pronounced when the economic bonding between the customer firm and the supplier is stronger, when the customer firm is geographically closer to its supplier, and when the relationship between the two firms matures. Furthermore, we document that a customer firm’s product market power increases demand stability for its supplier, reduces the supplier’s cost of debt, and improves the supplier’s investment efficiency.

Banking uncertainty and lending: does bank competition matter?

PurposeThis paper aims to investigate the link between uncertainty in banking and bank lending behavior, particularly shedding light on the modifying role of bank competition in the nexus.Design/methodology/approachThe study uses a panel of Vietnamese banks over the 2007–2019 period for empirical analysis and the dispersion of shocks to bank-level variables to measure banking uncertainty. To strongly confirm our findings, the authors perform a battery of alternative checks based on different econometric techniques, including fixed effect regressions with Driscoll–Kraay standard errors, the two-step system generalized method of moments estimator and the least squares dummy variable-corrected estimator.FindingsUncertainty induces multifaceted unfavorable impacts on bank lending. Concretely, banks tend to restraint loan growth, suffer more credit risk, and charge higher lending rates during periods of higher uncertainty. Further investigation reveals that lending activities of banks with greater market power are less sensitive to adverse uncertainty shocks; in other words, increased competition in the banking system is associated with more substantial consequences of uncertainty on bank lending.Originality/valueTo the best of the authors’ knowledge, this study is the first attempt to simultaneously explore the impacts of uncertainty on quantity, quality and prices of bank lending. This paper also aim at putting forth the level of uncertainty particularly related to the banking sector. Importantly, examining the conditionality of the linkage between uncertainty and bank lending with respect to bank competition is entirely novel.

The Impact of Logistics on Marketing Margin in the Philippine Agricultural Sector

The logistics industry is a fundamental aspect of fulfilling the supply chain in agriculture. Agricultural farmers in the Philippines often use the services of middlemen to transact on their behalf since these intermediaries possess better information, and engaging in logistics affects the marketing margin in the process. Frequently, logistics costs cause marketing margin to increase, leading to high farm-retail prices of agricultural goods. This paper examines if the existence of middlemen improves farmers' wages even with the additional logistics costs incurred. The variables' secondary data were all gathered from the Philippine Statistics Authority, and its annual frequency spanned the period of 1995 to 2019. Using Ordinary Least Squares (OLS) regression analysis procedure and diagnostic tests prove that logistics cost negatively affects marketing margin while farmers' wages have a positive relationship. The findings of this study address the presence of a longer supply chain, asymmetric information, technology, storage and facilities, and added logistics costs in agricultural transactions. Although middlemen have greater market power than the farmers, these mediators are still affected by the changes in the logistics costs since it is unavoidable for them to reduce the price due to the need to competitively sell the commodities.

Market power and credit rating standards: Global evidence

We examine how the market power of credit rating agencies (CRAs) affects their rating standards. Using a global sample across 26 countries from 1994 to 2019, we find that greater market power of global CRAs, measured by their country-level market shares, is associated with stricter corporate ratings. In addition, the increase in global CRAs' market shares contributes to the tightening trend in their credit ratings worldwide. Exploiting the NRSRO designation of local CRAs in Japan, we find that global CRAs issue more inflated ratings following a decline in their market power. Further, global CRAs' greater market power is associated with timelier ratings, fewer missed defaults, but more false warnings. Collectively, our findings suggest that global rating agencies' market power leads to stricter rating standards and timelier ratings by strengthening the agencies’ reputation concerns, but at the expense of increased false warnings.

Self-Organising (Kohonen) Maps for the Vietnam Banking Industry

This is the first study to use the self-organisation (Kohonen) map technique, an artificial neural network based on a non-supervised learning algorithm, to categorise Vietnamese banks into super-class groups. Drawing on unbalanced yearly data from 2008 to 2017, this study identifies two super-class groups (one and two). While group one consists of joint stock banks, group two consists of commercial state and joint stock banks. Using the non-structural indicator, the Lerner index, to capture market power, and the data enveloped analysis technique to measure bank performance, our result shows significant differences in Lerner scores (which represent bank market power) of the two groups of banks. Differences in the Lerner scores provide evidence of a group of strong banks that is isolated from other banks. This implies that this strong bank group has the potential to be monopolist and impairs Vietnam’s competitive banking environment. The reason is that group two banks may be more profitable due to greater market power, whereas group one banks may struggle to cut costs to remain viable. These findings provide a better understanding for bank executives, policymakers and regulators of the Vietnam banking industry, and ensure an efficient and competitive Vietnam banking environment.

Assessing the impact of tradable discharge permit on pollution reduction and innovation: micro-evidence from Chinese industrial enterprises

The impact of a tradable discharge permit system on pollution reduction, pollution intensity, and innovation depends on market perfection. To verify this assumption, this study matches China’s Industrial Enterprise Database with the Industrial Enterprise Pollution Emissions Database and applies the difference-in-difference-in-difference estimator for empirical analysis. The results show that implementing a tradable discharge permit policy can promote pollution reduction and pollution intensity reduction for pilot regions with a high degree of marketization. However, the implementation of a tradable discharge permit policy did not have a significant impact on innovation. This indicates that the Porter hypothesis was not valid during the sample period from 2000 to 2012 in China. Enterprises tend to achieve pollution abatement through end-of-pipe control or reduced output rather than through technological innovation. Moreover, high institutional transaction costs lead to a weak incentive effect of the tradable discharge permit system on promoting enterprise innovation. Furthermore, greater market power is conducive to corporate innovation in regions with a high degree of marketization. The results of a heterogeneity analysis show that the impact of a tradable discharge permit system differs by enterprise ownership and region. The findings have clear policy implications: the Chinese government should consider applying the hybrid approach by combining a tradable discharge permit system with a given emission standard and foster competition.

Does market power explain margins in dual banking? Evidence from panel quantile regression

AbstractThis paper examines whether banks with greater market power have more control over the net interest margin. To this end, we employ panel quantile regression (QR) to a sample of Islamic and conventional banks from 14 dual banking countries during 2005–2018. Our empirical findings show that greater market power in a dual banking system results in a higher net interest margin, which is in line with the mainstream theory of monopolistic competition. After introducing the Islamic interaction dummy in the model, we find that in the case of Islamic banks the result is significant only for higher quantiles of bank margins. This study also has some policy implications, namely that the concentration of market power can be countered by developing a competitive environment among the banks to have competitive bank margins. We further suggest that to get a higher profit margin, Islamic banks need to be more competitive and more efficient while deciding the profit margins.

Horizontal mergers and supplier power

Supplier power, such as the ability of branded goods suppliers to dictate terms to retailers, is an important feature of many markets. We show that supplier power can counteract the effects of downstream mergers on consumer prices where there are two-part contracts. This is because greater market power allows suppliers to set contracts that internalise partially the impact of the merger on downstream prices. Post-merger, the supplier reduces the per-unit price at which it supplies the merged downstream firms, with the aim of maintaining total industry profitability. We modify the standard upward pricing pressure (UPP) formula to account for the supplier's response to a horizontal merger in the downstream market while preserving much of the simplicity of the standard approach.

The Impact of Capital Structure and Institutional Environment on Bank Competition: A Cross-Country Analysis

ABSTRACT Using cross-country data for 1999–2019, we investigate how bank capital structure and institutional environment affect bank competition. Banks with a higher Tier 1 ratio have greater market power, and lowering activity restrictions and bank entry requirements enhances competition. Banking systems with greater capital stringency and official supervisory power tend to be more competitive. During financial crises, higher Tier 2 capital corresponds with greater market power. Foreign banks’ market power is sensitive to Tier 2 capital.

Towards Smarter Regulation in the Areas of Competition, Data Protection and Consumer Law: Why Greater Power Should Come with Greater Responsibility

Based on a mix of conceptual insights and findings from cases, this paper discusses three ways in which the effectiveness of regulation in the areas of competition, data and consumer protection can be improved by tailoring substantive protections and enforcement mechanisms to the extent of market power held by firms. First, it is analysed how market power can be integrated into the substantive scope of protection of data protection and consumer law, drawing inspiration from competition law’s special responsibility for dominant firms. Second, it is illustrated how more asymmetric and smarter enforcement of existing data protection rules against firms possessing market power can strengthen the protection of data subjects and stimulate competition based on lessons from priority-setting and cooperation by consumer authorities. Third, it is explored how competition law’s special responsibility for dominant firms can be further strengthened in analogy with the principle of accountability in data protection law. Similarly, it is discussed how positive duties to ensure fair outcomes for consumers are developed in consumer law. The analysis offers lessons for improving the ability of the three regimes to protect consumers by imposing greater responsibility on firms with greater market power and thus posing greater risks for consumer harm.

The Performance of State-Owned Enterprises: New Evidence from the China Employer-Employee Survey

Drawing on data from a random sample of manufacturing firms collected in 2016 for the China Employer-Employee Survey (CEES), we examine differences in measures of productivity and financial returns between state-owned enterprises (SOEs) and private firms in China. The summary statistics show that labor productivity and total factor productivity are generally higher at SOEs than at private firms, but the productivity advantage of SOEs can mostly be explained by the higher levels of human capital of their workers, greater market power, and better management. Furthermore, SOEs’ advantage in productivity exists only in industries with higher SOE concentrations. In contrast, measures of financial returns—return on assets and return on equity—are lower for SOEs than for private firms. We believe that these results may reflect the fact that SOEs generally have easier access to capital, human capital, and markets than other types of firms in China.

The Effects of Market Competition on Cardiologists' Adoption of Transcatheter Aortic Valve Replacement.

For decades, the prevailing assumption regarding the diffusion of high-cost medical technologies has been that competitive markets favor more aggressive adoption of new treatments by health care providers (ie, the "Medical Arms Race"). However, novel regulations governing the adoption of transcatheter aortic valve replacement (TAVR) may have disrupted this paradigm when TAVR was introduced. The objective of this study was to assess the relationship between the market concentration of physician group practices and the adoption of TAVR in its first years of use. This was a retrospective cohort study. Physician group practices (n=5116) providing interventional cardiology services in the United States from May 1, 2012, to December 31, 2014. The first use of TAVR as indicated by a fee-for-service Medicare claim. Covariates including characteristics of the physician groups (ie, case volume, hospital affiliation, mean patient risk) as well as county-level and market-level characteristics. By the close of 2014, 9.3% of practices had adopted TAVR. Cox proportional hazards models revealed a hazard ratio of 1.26 (95% confidence interval: 1.16-1.37, P<0.001) per 1000 point increase in the physician group practice Herfindahl-Hirschman Index, indicating each 1000 point increase in group practice Herfindahl-Hirschman Index was associated with a 26% relative increase in the rate of TAVR adoption. Adoption of TAVR by physician groups in concentrated markets was potentially a consequence of the unique regulations governing TAVR reimbursement, which favored the adoption of TAVR by physician groups with greater market power. These findings have important implications for how future regulations may shape patterns of technology adoption.