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WP 2007/1. József Molnár–Márton Nagy–Csilla Horváth: A Structural Empirical Analysis of Retail Banking Competition: the Case of Hungary

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Abstract

In this paper we analyze the degree of competition in the Hungarian household credit and deposit markets. We estimate discrete-choice, multinomial logit deposit service and loan demand functions for each bank and calculate the corresponding price elasticities. Two models of the banking industry are considered: a static, differentiated product Nash-Bertrand oligopoly (as non-collusive benchmark) and a cartel. With estimated marginal costs and observed interest rates we calculate the price-cost margins and compare these to the theoretically implied ones. We find that in our sample period the competition in the Hungarian banking sector is low, i.e. price-cost margins are high.

JEL: G21, L11, L13.

Keywords: Demand, discrete choice, product differentiation, banking, market power.

WP2007_1