Network diseconomies and optimal structure

This paper explores the effect on costs when firms within an industry must interact with each other in the normal course of business. Such interaction will generally cause the socially optimal scale of each firm to deviate from its minimum average cost scale. In addition, the socially optimal industry structure may be more concentrated than conventional firm-level cost studies would suggest and may also differ from the unregulated (free-entry) equilibrium structure. These concepts, while potentially applicable to several industries, are here made more precise for the banking industry, both theoretically and empirically.