Structure, Conduct and Performance of US Banking Sector
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Added on 2019-09-23
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This assignment evaluates the competition and concentration in the United State’s banking sector. Read about the SCP relationship in US banking sector, the structure of the market, and conduct of the banks and performance of the banks in a detailed manner.
Structure, Conduct and Performance of US Banking Sector
Added on 2019-09-23
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1Running head: Markets and competitionStructure, Conduct and Performance of USBanking Sector
Markets and competitionTable of ContentsIntroduction......................................................................................................................................3SCP in US banking sector................................................................................................................5Structure of the market................................................................................................................5Conduct of the banks...................................................................................................................6Performance of the banks............................................................................................................7Drawbacks to the SCP framework relating US banking sector.......................................................8Conclusion.......................................................................................................................................9References......................................................................................................................................10Bibliography..................................................................................................................................112 | P a g e
Markets and competitionIntroductionThe aim of this assignment is to evaluate the competition and concentration in the United State’sbanking sector. This is critically done by analysis of price-concentration relationship in the retailbanking sector of the industry. The assignment will follow along with the lines of Berger andHannan (1989), who studied US banking industry in the particular way as well as Okeahalam(1998), who studied price-concentration relationship in South Africa. The US banking sectortook a new dimension with the initiation of its economic reforms in relation to specific policiesand regulation since the business year 1990. The major strategies applied by the banks under thecompetitive business conditions incorporates distinct products and services, strategic marketingsuch as advertising, widening customer base by promotional activities as well as diversificationto reduce the risk of operation, mergers and acquisitions in order to consolidate the business andincrease efficiency as well as floating joint ventures with foreign banks for enhancing capitalbase and efficient management. The policy and regulatory framework changes brought by the USgovernment significantly brought huge competition in the market while enhancing the efficiencyof the banks. This significantly raised several issues and affected the structure of the market inUS banking sector. The regulatory roles that have to be made by the banks such as JPMorganChase are to sustain the competitive market and enhance the efficiency of the banks. Therationale rising behind this issues lies in the structure-conduct-performance (SCP) relationshipsdeveloped by Mason (1939), significantly suggests that the possibility of collusive behaviorcritically enhances when the market is concentrated with few firms. This, in turn, states thathigher the market concentration, the larger the firm can earn profitability. The SCP relationshipsin US banking sector are well explored in the literature. The limitation and contradictions in the3 | P a g e
Markets and competitionSCP relationships lie in assumptions relating to measures of market structure. Furthermore, themarket concentration may not be a reflection of the collusive behavior of the banks and it is theinterpretation of their superior efficiency. The consideration of both efficiency and market powerhas to be considered for critical understanding and analysis which is largely unexplored in theexisting studies. The assignment has four section discussing SCP relationship in US bankingsector, the structure of the market, and conduct of the banks and performance of the banks in adetailed manner.4 | P a g e
Markets and competitionSCP in US banking sectorStructure of the market The structure of the market is analyzed in terms of the degree of seller’s concentration as it is anessential feature of the extent of flawed competition in the US market. As per the industrialorganization literature, the measures used in this study are n-firm concentration ratio andHerfindahl-Hirschman Index (HHI) in order to learn the extent o market concentration in the USbanking sector. The HHI and n-bank concentration ratio can measure the degree of concentrationin the market entirely. After analyzing the US banking sector, few critiques suggested that thebanks have a stronghold in the market in terms of the banking sector. The supply that affects thebusiness of US banking sectors is product or service durability and business attitude (Bhatti &Hussain, 2010). On the other hand, the demands that affect the business are the availability ofsubstitutes and consumer behavior. The asset base and average market size of the bankssignificantly increased during the year 2000 to 2010. There are not many variations in thesemeasures which state that the asset base and market size are consistent across the US banks. Thediversification and integration of foreign banks in the country significantly affected the marketconcentration of US banking sector which affected the business profitability (Jaw, Lo & Lin,2010). The average market share of the banks was consistently low during the period underconsideration. Although when the extent of variations declined, the market share enhanced. Theentry and exit condition associated with the US banking sector is critical and firm whichcritically affects the cost structures and product differentiation. The barriers to entry are at higherlevel affecting business profitability. The n-firm concentration ratio and HHI suggest that themarket concentration in the sector is consistently low which in turn decreases market5 | P a g e
Markets and competitionconcentration during the period. In contrast, the declines have not been critical. Table 1, 2 and 3in Appendix significantly provides critical explanation of the structure of the market in USbanking sector. After analysis, it has been learned that US banking sector measured in terms of amarket share depends critically on its structural aspect of the market such as past financialperformance and conduct like selling effort (Kunc & Morecroft, 2010). The SCP relationships inUS banking sector is multidirectional as the structure of the armlets impacts performance byconduct. The relationship is instantaneous as if the selling efforts lagged the financialperformance also lags behind which critically affect the supply and demand of the banks relevantto cost structure.6 | P a g e
Markets and competitionConduct of the banks Under the imperfect competition in the market of US banking sector, financial performance ofthe banks relies upon to a large extent on its selling efforts which incorporates ‘marketing andadvertising of products’ and services and ‘R&D of service networks’. Advertisingsignificantly impacts the financial performance of the banks by providing distinct features of itsproducts and services offered by its competitors creating enhancing image and entry barriers.Attaining the customers in favour of these distinct features of its products or services criticallymakes the demand inelastic over other alternatives and this in turn gains the bank to capture themarket entirely. Advertising also creates significant barriers to entry of the new banks as well asthe upward mobility of the small banks (Lennartz, Haffner & Oxley, 2012). The entrants in thebanking sector might consider advertising to enhance their visibility in the market. In contrary,intensive counter advertising by the existing banks might drain out the images of the entrantswhich critically make to capture low share of the market. This in turn limits the competition levelof the banks in the market which in turn enhances the financial performance of the banks. Interms of R&D of service networks, expenditure by the banks towards building up suchinfrastructure and distribution related to the complementary assets enhances the financialperformance of the banks in 2 significant ways. At first this effort raises the competitiveness ofbanks by developing service networks which critically facilitates appropriateness of products andservices which in turn enhances efficiency of the banks. And secondly, such asset enhances thebargaining power of the banks in terms of equity that is linked with the foreign collaborations asthe national banks have wider services network in comparison to the foreign banks (Lukka,2010). The selling efforts made by the banks towards promotional and development of theservice networks as well as advertising operating in the US is relatively low with the enhanced7 | P a g e
Markets and competitiontrends over the years. Table 4 illustrates the selling efforts of the banks. This in turn state that USbanks has used advertising and R&D service networks to enhance its position in the market. Incontrary, it is observed that selling efforts varied considerably across the US banks. Afteranalyzing it has been learned that the estimated coefficients are critically positive and significant.It is identified that banks that has a larger asset base, standards financial performance at past andlarger market share can make higher selling efforts in relation to advertising and R&D. It hasbeen also identified that banks with higher market share attain the channel of advertising andpromotion to enhance their position in the market while creating image advantage,complementary assets, and strategic entry barriers. In contrary (McWilliams & Smart, 1993)opposed that greater selling efforts of the private banks are influenced at the huge rate by theirbusiness approaches and motives. 8 | P a g e
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