Measurement and Determinants of Competition in Private Banking Industry in India during 1992-2002

Using an appropriate theoretical framework and econometric methodology, the study seeks to measure and model competition in private banking industry in India in an attempt to analyze the process of market dynamics in the industry. The changing scenario of private banking consequent to deregulation is the motivation behind the study. It uses the concept of competition proposed by Stigler (1961) and measures it by Bodenhorn's (1990) measure of mobility. The study provides a critique of the mechanism of inducing competition, which is implicit in the Narasimham Committee (1991). It then provides the theoretical background of an alternative mechanism based on Structure- Conduct-Performance (S-C-P) paradigm, which incorporates basic conditions and strategic groups, apart from including entry, economies of scale, product differentiation and price-cost margin. One basic contention of the study is that competition goes beyond ‘conduct' and encompasses all the four components of S-C-P paradigm: basic conditions, structure, conduct and performance. Accordingly, a three-equation simultaneous equation model is used to ultimately estimate the equation of competition through Tobit technique. The result demonstrates that variables related to basic conditions, structure, and conduct and performance influence competition. The study has found evidence against the simplistic relationship between concentration and competition, which remained implicit in the literature. The study also developed a methodology to arrive at market form from an analysis of three aspects of a market and concludes that private banking industry in India is characterized by monopolistic competition