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ABSTRACT
This article is surveying the 1960s-1980s empirical research designed to provide evidence on how the market structure influences the performance of banking organizations. The empirical studies are categorized into two groups. The first one evaluates the relationship between bank market structure and its performance with 'one-third' of the studies reported an entirely positive relationship. While the second group concentrates on the efficient structure that is conductive to competitive pricing of banking services. The majority used return on assets and interest and fees on loans to total loans ratios as performance measures, and market concentration as a measure of market structure. However, there is neither theoretical affirmation, nor empirical evidence for using these measures. The alternative approaches, as well as the recent changes in banking industry, are not just challenging SCP traditional hypothesis, but also limiting its significance and validity as a basis for, nowadays, public policy making.
JEL Classification: G21.
Key Words: SCP; Banks; Literature Review; Policy Implication.
1. INTRODUCTION
The Structure-Conduct-Performance (SCP) can be defined as the relationship between market structure, firm conduct and firm performance. It postulates that the existence of entry barriers is the major determinant of firm profits. So that, the greater cost of entry makes it easier for existing firms to maintain monopoly profits. New entrants will diminish the level of those profits. Therefore, market concentration decreases the cost of collusion between firms and results in abnormal, i.e. higher than normal, profits for existing firms in the market. The SCP has been one of the most tested hypotheses in the industrial organizations literature. Almost, most of SCP empirical studies have supported the validity of SCP paradigm, by providing evidence on the positive relationship between market structure and firm performance indicators [see, for example, Weiss, 1974].
As bank regulation developed, the traditional SCP paradigm has been the driving force behind antitrust enforcement in the banking industry since 1960s [Evanoff and Fortier, (1988)]. Since then, many SCP empirical studies have been undertaken in the banking industry and provide evidence similar to those found in the industrial organizations literature. However, many researches [see, for example, Gilbert (1984) and Osborne and Wendel (1983)] have questioned the methodology used in banking literature. Others questioned certain data problems, such as limited samples, inappropriate measure...