Product mix, transactions and cost behaviour: a study of South African bank branches

This paper utilizes microeconomic theory and a panel data set to assess the impact of product mix and transactions on cost behaviour of bank branches in South Africa over the short and long-term. Estimates of properties of concavity and monotonocity indicate that the cost functions of typical bank branches in South Africa are neither consistent with short-term nor long-term cost-minimizing behaviour. This corroborates earlier findings which indicate that South African banks have low production efficiency and high market power. In addition the cost functions and two production-output type indices indicate that overall, the intermediation-output type mix (foreign exchange and custodial services) has a more significant effect on cost behaviour than the production-output type mix (cheque and deposit accounts). The variety of production-output type services provided by a branch appears to have limited effect on costs. However the financial value of production-output type transactions has an impact on costs while the financial value of intermediation type products does not. Branches that provide intermediation-output type products tend to have higher variable costs - the key determinant of costs is the number of transactions.