Does Market Power Influence High Bank Profits in the Pacific's Small Island States? Some Evidence from Fiji

This is the first study to simultaneously estimate the influence of market power and efficiency on profitability of banks in a Pacific Island context. Two market power hypotheses — the Structure-Conduct-Performance (SCP) and the Relative-Market-Power (RMP) hypotheses together with two measures of the Efficient–Structure (ES) — X- and scale efficiencies are estimated. The non-parametric DEA technique is used to estimate the two efficiency scores for banks in Fiji over the 2000-2010 period and the dynamic GMM to estimate the relationships between market power and efficiency vis-à-vis profitability. Results show that the RMP and ES theories might hold but not the SCP. Profits appear to persist over time. Policy implications are considerable including that any suggestions to limit further mergers and acquisitions of banks in the region may have to be properly debated