Bank pricing under oligopsonistic-oligopoly
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 re...
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| Format: | conferenceObject |
| Published: |
2012
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| Online Access: | http://hdl.handle.net/10725/7312 http://dx.doi.org/10.2139/ssrn.2004294 http://libraries.lau.edu.lb/research/laur/terms-of-use/articles.php https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2004294 |
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| Summary: | 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. |
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