BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 1/2012:
Bank pricing under oligopsony-oligopoly: Evidence from 103 developing countries
Walid Marrouch ()
and Rima Turk-Ariss
Abstract: We propose a generic oligopsony-oligopoly model to study
bank behavior under uncertainty in developing countries. We derive a
pricing structure that acknowledges market power in both the deposit and
loan markets and identify two theoretical components to the loan rate: a
rent extraction component resulting from the interaction between the choke
price of loans and prevailing banking structures, and a markup on deposit
funding costs that captures the transformation efficiency of financial
intermediation. We then test our structural specification with longitudinal
data for 103 non-OECD countries and find that both the market structure
under uncertainty and the deposit rate matter significantly in pricing.
However, the role played by the rent-extraction share in pricing, on
average, dominates funding costs in developing countries, and so
underscores the importance of market structure in banks’ pricing power.
Keywords: intermediation; bank pricing; market structure; uncertainty; developing countries; (follow links to similar papers)
JEL-Codes: C33; G21; L13; (follow links to similar papers)
26 pages, February 23, 2012
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