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6. Conclusion
This paper suggests a joint estimation procedure to investigate market power and cost efficiency at the individual bank level. We specifically employ CSSFM, which is composed of a cost frontier and two output price frontiers. The cost frontier allows us to estimate cost efficiency and the two price frontiers allow for estimating the degrees of competition in the markets for loans and investments. In this manner, the new Lerner indices for products of loans and investments can be estimated by relying on the simultaneous equations model, which avoids obtaining negative measures of the Lerner index, since the relationship between output price and MC is automatically built into the model. On the contrary, the conventional Lerner index suffers from getting negative values in the Lerner index for some observations.
The empirical results show that the mean values of the new Lerner index in all selected countries are larger than those of the conventional model, together with smaller standard deviations. This implies that the conventional model is inclined to exaggerate the degree of market competition. Our CSSFM model confirms that all banks in the five countries are running under monopolistic competition, except for the two investment markets of Luxembourg and France, in which the two markets can be characterized as perfect competition.
This paper employs the new meta-frontier model, first introduced by Huang and Liu (2013), to estimate and compare bank efficiency and market power across five countries over the period 1998-2010. The mean TGR of CSSFM is close to unity, indicating that all of the country-specific cost frontiers are quite close to the meta-cost frontier. The sample banks employ analogous, advanced production technology in the highly integrated European market, which is consistent with Bos and Schmiedel (2007). The component of CE falls short of the component of TGR, implying that the sample banks should enhance their managerial abilities by adjusting the three inputs for a given output
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mix to improve their cost efficiency scores. Evidence is found that all average TGR measures from the new meta-frontier model exceed those from the LP model with smaller standard deviations.
The potential Lerner index measure can be split into two parts: the Lerner index and MCGR. Some implication can be drawn from the empirical results. Sample banks with higher market power are suggested either to increase their output prices or to reduce their marginal costs. It is difficult for banks to raise their output prices, due possibly to the risk of potential entrants, which complies with the feature of a contestable market. Therefore, banks may reduce their marginal costs to maintain their higher market power. First, bank managers should adopt the advanced technologies to efficiently produce various financial products or adopt financial innovation swiftly in order to serve their customers at a lower cost, thereby earning higher profits. Banks in France, Italy, and Luxembourg may especially reduce their marginal costs as the
L
Old estimates are on average negative, which is inconsistent with a firm’s profit maximization behavior. Second, the sample banks are suggested to reallocate their input factors, such as hiring less labor or reducing operating costs by adopting superior technology. Finally, banks are encouraged to expand their market shares through M&As, thereby cutting their production costs that arise from economies of scale and scope.‧ 國
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