INFERRING MARKET POWER FROM TIME-SERIES DATA - THE CASE OF THE BANKING FIRM

Using bank-specific data on deposit rates, this paper tests for the ex istence of market power in banking by means of time-series estimations . A test is developed that can reject perfect competition on the basis of the observed relationship over time between deposit rates and secu rity rates (adjusted for operating costs). The analysis also examines whether pricing behavior differs across markets and banking products i n a manner consistent with hypothesized differences. Price-taking beha vior is rejected for the vast majority of banks. For the deposit categ ory that one would expect to be more geographically limited, greater m arket power is found to be exercised by banks located in more concentr ated markets.