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Alessandra FerrariUniversity of Reading
Very interesting paper, unique dataset; Product differentiation, C.V. analysis
(NEIO) with endogenous risk; Neat modelling of risk: it affects L and it
is endogenous: banks choose rL, rD, γ, B; Exclusion of risk causes bias in inference
on competitive dynamics; C.V. are function of MS and CR (Hannan,
S.C.P.); Interesting, largely consistent results.
V. ambitious, risks to miss the focus and aim.
2 main problems
1. Lost advantage of paper in analysis of competition;
2. Possible specification bias;
Main advantage is the effect of risk on the dynamics of competition: not analysed.Instead analysis of C.V. jumps into SCP, but incompletely: different roles of CR and MS, functional form, interaction, structure vs efficiency etc. Why? How are results consistent?
Possible bias due to omission of time effects or a macro effect (exogenous demand shifter) (GDP, reliance on banking, Euro…?). Explains:Rivals’ branches elasticity εd
BR > 0 call it β1
you get β1 + β2β12 with β2 and β12 > 0
Similarly for εLγ < 0 and εL
γR <0 and very large:
large negative bias due to effect on denominator of γ.
Intercepts in equations; Branch competition at the local level rather
than country level? Coefficients on the C.V. determinants (α, β)
have the same interpretation for loans and deposits: they model expected reactions (collusive or not), not how that r enters the profit equation.