Review of Industrial Organization 20: 221–238, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Conduct in a Banking Monopoly
Department of Economics and Finance, University of Wyoming, Laramie, WY 82071-3985, U.S.A.
Abstract. Extending previous empirical work on concentrated markets, this paper applies a Rosse–
Panzar revenue test to quarterly data from a monopoly bank. The test rejects the hypotheses of static
monopoly pricing or perfectly contestable pricing. Other tests suggest that the bank was in long-
run equilibrium during the sample period and did not exhibit particular forms of expense-preference
behavior. Possible interpretations of the bank’s conduct include limit pricing to deter entry or an
objective other than maximizing static proﬁt. The results raise new questions about conduct among
monopoly banks or in declining markets.
Key words: Banking, conduct, monopoly, Rosse–Panzar.
Prior research has found that almost all variation in competitive conduct occurs
with the entry of the second or third ﬁrm into a market (Bresnahan and Reiss,
1991). In banking, studies have found that conduct can be substantially competitive
with only two banks (Shaffer and DiSalvo, 1994). This paper builds on the theme
explored in those two studies to investigate the pricing conduct of a monopoly
bank. Several considerations motivate such a study. First, though Bresnahan and
Reiss found signiﬁcantly noncompetitive pricing among monopolists, that average
ﬁnding might mask substantial variation across their sample. Second, the sur-
prisingly competitive duopoly pricing reported in Shaffer and DiSalvo raises the
further empirical question of whether some monopolists may also price below the
static neoclassical norm. In a closely held ﬁrm, preferences of the owner-managers
may distort the pricing decision and may also thwart the effective operation of the
market for corporate control as a mechanism for enforcing proﬁt-maximizing or
There are reasons to expect that banks’ pricing may be less sensitive to market
concentration than in other industries. Broecker (1990) and Bizer and DeMarzo
(1992) show that multiple lenders generate adverse borrower selection and moral
hazard; Shaffer (1998) ﬁnds empirical evidence of this problem, with higher loan
loss rates where more banks serve a market. Interbank capital market externalities
are documented by Slovin et al. (1999) and others, yielding another mechanism that
The author is grateful for helpful comments from Nicola Cetorelli, Ken Kopecky, and a referee.