Entry, Concentration and the Process of Competition: Early Days of Deregulating Private Banking Industry in India

Abstract

Extant studies treat the impact of entry on concentration, market structure and competition rather mechanically; with some even going further to naively identify concentration as an indicator of competition. This paper critically examines these contentions by studying the trends and determinants of concentration with a view to gaining an insight into the process of competition. The deregulation of domestic private banking industry in India, since the early 1990s, provides an opportunity for such a study. This paper is the first of its kind to identify a distinct pattern of change in the concentration ratio and explains its determinants in terms of a cubic form equation. The determinants of Herfindahl’s Concentration Ratio are number of firms, average asset size of the firms and their skewness. The study also points to a possible generalized pattern that market concentration follows upon deregulation of the industry.