Market structure and entry: A study of the determinants of market concentration in private domestic banking industry in India

Abstract

The relationship between concentration and market structure has not been fully explored in the literature. The existing understanding of the impact of entry on concentration and competition through market structure is rather mechanical and needs to be re-examined. The deregulation of domestic private banking industry in India, since early nineties, provides the opportunity for such a study. The present study takes up an organic approach that is based on an analysis of the identity of firms, the dynamics of rank and their market shares. Although concentration is the central issue in market structure, it can not be taken uncritically as an index of competition. There has not been any empirical analysis of the pattern and determinants of market concentration. This paper is the first of its kind to identify a distinct pattern of change in the concentration ratio and explain it in terms of a cubic form equation. Concentration is explained in terms of its determinants- number of firms, average asset size and their distribution, which are found to be highly significant. The results show that the industry dynamics is more important than policy factors in explaining concentration. The study arrives at definite evidence that relates number of firms to concentration. However, the purported negative impact is not easy to interprete. The study also points out to a possible pattern that concentration follows upon deregulation. This, it is argued, may constitute a possible evidence of existence of economic size.