ABSTRACT
Bresnahan (1982) and Lau (1982) present a short-run model for the empirical determination of the market power of an average bank. Based on time series of industry data, the conjectural variation parameter λ = (1 + d
∑ i =j Yj/dYi)/n,
with 0 ≤ λ ≤ 1, is determined by simultaneous estimations of the market demand and supply curves. Banks maximize their profits by equating marginal cost and perceived marginal revenue. The perceived marginal revenue coincides with the demand price in competitive equilibrium and with the industry’s marginal revenue in the collusive extreme (Shaffer, 1993). This chapter presents an application of the Bresnahan model to both loans markets and deposits markets in nine European countries over 1971-1998, based on Bikker (2003), and gives a survey of other applications of the Bresnahan approach in the literature.
