Bank Pricing under Oligopsonistic-Oligopoly: Evidence from 103 Developing Countries
30 Pages Posted: 16 Mar 2011 Last revised: 21 Jan 2012
Date Written: January 14, 2012
Abstract
We propose a generic oligopsonistic-oligopoly model to study bank behavior under uncertainty in developing countries. We derive a pricing structure that acknowledges market power on both the deposit and loan market and identify two theoretical components to the loan rate: a rent extraction component resulting from the interaction between the choke price on loans and the prevailing banking structures, and a mark-up on deposit funding costs that captures the transformation efficiency of financial intermediation. We then test our structural specification using longitudinal data for 103 non-OECD countries and find that both market structure under uncertainty and the deposit rate matter significantly in pricing. However, the role played by the rent extraction share in pricing dominates, on average, funding costs in developing countries, underpinning the importance of market structure in bank pricing power.
Keywords: Intermediation, Bank Pricing, Market Structure, Uncertainty, Developing Countries
JEL Classification: C33, G21, L13
Suggested Citation: Suggested Citation
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