Market structure and performance in Spanish banking using a direct measure of efficiency

This paper analyses the relationship between market structure and performance within the Spanish banking industry. Three different stochastic measures of efficiency are used (based on three alternative distributional assumptions for inefficiency: half-normal, normal-truncated and exponential). The results obtained support the ‘modified efficient structure’ hypothesis since, even though efficiency is the main determinant of profitability, market power (as reflected in a market share variable), also affects profitability. The results obtained also show that market share is an inadequate proxy for efficiency.