Measuring welfare loss of market power: an application to European banks

Abstract

From a model of imperfect competition among banking firms, this study derives an analytical expression that allows empirical quantification of the welfare loss associated with imperfect competition. Its application to the specific case of the European banking system shows that in spite of the process of deregulation, market power increased during the 1990s in 10 out of the 15 countries of the EU. The welfare loss associated with market power represents close to 2.5% of EU GDP.

Acknowledgements

Joaquín Maudos acknowledges the financial support of BBVA Foundation through the “Primera convocatoria de ayudas a la investigación en Economía, Demografía y estudios de población, y Estudios europeos”. The paper is developed within the framework of the research program of the Ministry of Science and Technology (SEC2002-03375).

Notes

 Monti (1972) and Klein (1971)

 Observe that the estimated marginal cost approximates the sum of marginal financial costs (r in expression (5)) and marginal operating costs. The translog cost function has been estimated introducing both fixed effects and a trend variable to capture the effect of technical change. As usual, restrictions of symmetry and of degree one homogeneity in input prices have been imposed.

 It has not been possible to obtain data on Total Assets for Ireland (1993–1994) and for Greece (1999–2000).