Intensity of competition and market structurein the Italian banking industry

The aim of this paper is to test the predictions of Sutton's model of independentsubmarkets for the Italian retail banking industry. This industry, in fact, can be viewedas made of a large number of local markets corresponding to different geographicallocations. In order to do that, I first develop a model of endogenous mergers thatshows how the number of firms is determined by the initial number of firms, by theintensity of competition, and by the degree of product differentiation, and how this inturn affects the one-firm concentration index. Then, in the second part, the number ofbanks in each submarket is estimated using a truncated model and a Poisson model.The size of the submarkets turned out to be at most provincial. Finally, the one-firmconcentration ratio of each province is regressed on the number of banks, also ininteraction with market size variables. As argued by Sutton for industries withexogenous sunk costs, a stronger and negative relationship is found as the marketbecomes larger....