Review of Industrial Organization 12: 9–22, 1997.
1997 Kluwer Academic Publishers. Printed in the Netherlands.
The Proﬁt-Structure Relationship in Legally
Protected Banking Markets Using Efﬁciency
W. SCOTT FRAME
Ofﬁce of Financial Institutions Policy, U.S. Department of the Treasury, Washington, D.C. 20220,
DAVID R. KAMERSCHEN
Department of Economics, University of Georgia, Athens, Georgia 30602-6254, U.S.A.
Abstract.Our various tests suggest that our sample banks that are shielded from competition by severe
intrastate branching restrictions have market power. This analysis has allowed us to test rigorously
the adverse effects of legal and possibly market barriers to entry. We reject the notion that proﬁts are a
result of superior
-efﬁciency. We conclude if these results are corroborated by further research (e.g.,
using other measures of proﬁt, efﬁciency, capital, etc), and if these and/or other barriers remain, the
Federal Reserve should be concerned with the competitive impacts of rural, in-market bank mergers.
-efﬁciency, proﬁt-structure, banking, entry, market-power, mergers.
Deregulation, increased competition from foreign and nonbanking ﬁnancial insti-
tutions, and a proﬁtable banking climate have led to a substantial increase in the
number of bank mergers in recent years.
This consolidation has spawned a public
policy debate regarding the sources of prospective gains to its participants. In theo-
ry, social beneﬁts may emerge if merger gains are derived from improved operating
efﬁciency, which results in lower unit costs, more favorable consumer prices, and
greater output. However, if these gains are accompanied by increased market pow-
er, then new combinations may impose social costs in the form of less favorable
consumer prices and reduced output.
In evaluating the competitiveeffects of mergers, policymakers rely on the notion
that greatersellers’concentration necessarilyleadsto unfavorableconsumer prices.
We are indebted to Timothy H. Hannan, Stephen A. Rhoades, Kevin E. Rogers, and David B.
Robinson for helpful comments and the Federal Reserve Bank of Atlanta for research support. The
views expressed in this paper are those of the authors and do not necessarily reﬂect those of the
In fact, SNL Securities estimates that between 1990–1994, there were over 1,500 bank mergers