The Industrial Economics of Banking

Abstract

The present chapter covers fundamental issues in the industrial economics of banking. The chapter begins by applying the imperfect-competition banking theory to explain the basis of the structure-conduct-performance paradigm. The chapter then applies a dominant-bank framework commonly employed by adherents of the structure-conduct-perforamnce paradigm to the issue of strategic entry deterrence, discusses the issue of retail loan and deposit interest-rate pass through, considers behavioral interactions among large and small banks, and evaluates theory and evidence regarding bank-customer relationships. The chapter concludes with discussions of the efficient structure challenge to the structure-conduct-performance paradigm and of the application of the theory of endogenous sunk fixed costs to banking.