Community bank product design within an asymmetric competitive market : An X-efficiency approach

Purpose – The purpose of this paper is to assess product and service arrays of community banks within competitive markets that are impacted by varying sized financial institutions. A cost efficiency model is used to understand the relationship of product offerings and business cycle response upon bank performance. Design/methodology/approach – A cost efficiency model is used to understand the relationship of product offerings and business cycle response upon bank performance. Markets comprised of alternate size and type of financial institutions are compared. Findings – Greater values of X _EFF i when institutions compete are observed in this analysis. Cost efficiency is lowest when community banks are the only institution in the market, and second lowest when credit unions are the only competing institutions. Call report data are analyzed from 1994 to 2013. The number of big banks increases community bank efficiency and efficiency of large banks. Also, the number of community banks does affect big bank cost efficiency. The magnitude of the effect pertaining to the number of community banks upon big bank efficiency is much smaller than that of the number of big banks on community bank efficiency. Originality/value – This study considers cost efficiency and profitability as measures of institution on the performance of a competing institutional type. The modeling approach uses cost efficiency as a method of observing the performance of financial institutions and an explanation of how firms persist, grow, and respond to changes in technology or regulation. The effects of the presence of each type of financial institution on the performance of another type are compared. Situations in which any number of one or more institutional types is present in a market are considered for analysis purposes.