Portuguese banking: A structural model of competition in the deposits market

In this article, we specify a structural model of competition in the deposits market, in line with the New Empirical Industrial Organization (NEIO) approach, and estimate it using data from Portuguese banking in the early 1990s. The article contributes to the general debate on competition issues by the theoretical model selected and by the particular banking industry considered. In contrast with most related articles, our model assumes product differentiation and interest rates as the strategic variables. Besides, research on competition in Portuguese banking deserves a special attention given the deep deregulatory changes operated. Our results suggest that, in the early 1990s, the Portuguese deposits market was operating under conditions far from perfect competition, evidencing market power features. However, some progress towards more competition could be clearly detected following deregulation. On the other hand, differences in the size of the banking institutions have not dictated significant differences in terms of their competitive behavior.