This study investigates the impact of market structure on the performance of banks in Pakistan. It explicitly tests two competing hypotheses: the Structure–Conduct–Performance paradigm and the Efficient Structure Hypothesis, providing insights into whether profitability stems from market concentration or efficiency. The study employs the Data Envelopment Analysis approach to measure banking efficiency and uses the concentration ratio to capture market structure. A regression framework is applied, with efficiency and market structure as key explanatory variables. Further, bank-specific controls are included to examine their effects on performance, measured by Return on Assets. Results show that although the concentration of the five largest banks slightly declined, it remains relatively high at 58.5%. Banks, on average, operate at 67% efficiency with an upward trend over time. The findings lend more substantial support to the Efficient Structure Hypothesis, indicating that profitability is primarily driven by technical and scale efficiency rather than market concentration, with individual bank market share affecting performance only as an outcome of efficiency gains. The analysis highlights that efficiency improvements are crucial in enhancing banks’ performance in Pakistan. Over the years, the banking sector of Pakistan has evolved in terms of market structure, efficiency, and banks’ performance. This study interprets the changes in the market structure in the context of the structure conduct performance hypothesis and/or the efficient structure performance hypothesis and answers the question regarding whether market power and/or efficient structure is relevant to the banks’ performance. For policymakers, the results suggest that efforts to improve competitive efficiency, such as encouraging innovation, risk management, and capacity utilization, are more effective than focusing solely on altering market concentration.
Khan et al. (Mon,) studied this question.