Determinants of Entry and Profits in Local Banking Markets

Determinants of Entry and Profits in Local Banking Markets This paper estimates a two equation model of market entry and profits, utilizing data on entry into over 2,000 banking markets over the period 1977--88. The entry equations measure whether entry depends on incumbent firms' profits and other market attributes that reflect the long-term attractiveness of markets for entry. Market profits, assumed to follow a partial-adjustment process, are affected by entry directly and indirectly through market structure. The model also corrects for an unavoidable source of error in market-level profits for the banking industry. The estimates suggest that a competitive process is at work in banking markets that limits the ability of supra-normal profits to persist. Entry is more likely in markets that have high profits, consistent with previous empirical results that market structure adjusts more quickly when profits are supra-normal. Population and population growth are also strong determinants of entry. Entry, in turn, reduces profits in rural markets. Review of Industrial Organization Springer Journals

Determinants of Entry and Profits in Local Banking Markets

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Kluwer Academic Publishers
Copyright © 1997 by Kluwer Academic Publishers
Economics; Industrial Organization; Microeconomics
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