Nonprice Competition in Banking Markets

Several recent papers [7; 13; 14; 15] have studied the possibility that the effect of seller concentration on advertising intensity in an industry takes the form of an inverted U. This paper extends the earlier empirical work by examining the relation between a firrti's market power and its use of nonprice forms of competition. The hypothesis tested is that a firm will increase its use of nonprice competitive devices as its market power initially increases from a low level, but that its use of nonprice rivalry will eventually decrease as its market power increases beyond some intermediate level. This study also adds to previous work by attempting to control for the differentiability of products by observing only one type of seller, namely a specific type of bank, and isolating several distinct local markets comprised of such sellers. The empirical results support the hypothesized nonlinear relationship between market power and the intensity of nonprice competition, althodgh the direction of causality is open to question. And subject to the difficulty of empirically separating persuasive from informative nonprice behavior, the results suggest that the prevalence of persuasive forms of competition increases as market power increases over an intermediate range.