The impact of bank holding companies on local market rivalry and performance

The bank holding company movement in banking is, in many respects, the counterpart of the conglomerate movement in the industrial sector. Both are characterized by a substantial amount of merger activity and thus raise questions as to the affect of the acquiring firms on competition. This study uses Tobit analysis and OLS to examine the influence of bank holding companies on rivalry and performance in 154 banking markets (1970–1979). Test results indicate that in markets where bank holding companies are a significant factor rivalry is higher, but so are prices even though profits are not higher, than in markets where bank holding companies are less important. These seemingly conflicting findings may be explained by the finding that significant holding company presence in a market is associated with relatively high noninterest expenses.     

Regularity and diversity in firm size distributions in U.S. industries

The size distribution of firms in manufacturing industries has long been a matter of interest in industrial organization. Distribution in different industries show considerable regularity that static economic theory fails to explain. Stochastic growth models appear to provide some insights, but empirical tests of the log-normal or Pareto distributions have been inconclusive. This paper draws on market share data for over three hundred U.S. manufacturing industries and analyses the distribution of largest firm sizes. A statistical test of the Pareto hypothesis, rather different from previous tests in the literature, decisively rejects that hypothesis as a general explanation for the upper tail of the distribution. Instead, great diversity among distributions is found, and the regularities that do emerge imply a greater clustering of large firms than predicted by theory.     

Size and rank stability of the 100 largest commercial banks, 1925–1978

Although the importance and rank stability of the 100 or 200 largest industrial corporations has been the subject of several studies, no comparable studies have been conducted in banking. Questions about the position and role of the 100 largest banks are beginning to emerge as a result of the 1980 thrift institution legislation and the prospect of interstate banking in the not too distant future. Data constructed for this study reveal that 1) concentration of deposits in the 100 largest banks increased from 33.7 percent in 1925 to 51.4 percent in 1978, 2) the pattern of change and the absolute level of concentration are remarkably similar for the 100 largest industrials, 3) deposits have become increasingly concentrated within the top 100 banks, 4) mobility and turnover have been relatively stable since 1925, 5) merger activity is partly responsible for the increased concentration and observed mobility and turnover, and 6) there has been a notable increase in the geographical dispersion of banks among the top 100.     

Polymorphism in competitive strategies: Trading stamps

This paper uses the example of trading stamps to examine a model of competitive nonprice marketing strategies. A concept borrowed from ethology, polymorphic equilibrium, is developed and used to explain salient features of trading stamp use by retail firms. The results contribute to an understanding of why virtually identical firms may optimally choose quite different competitive strategies. The paper also demonstrates the possibility of cyclical movements in the proportion of firms that adopt nonprice strategies such as the use of trading stamps.     

The effects of mortgage laws on home mortgage rates

Mortgage rates differ between regions because of usury laws, not import of mortgage funds, loan-to-value ratios, and mortgage laws. This study focuses on the effects that state laws regarding foreclosure have on regional mortgage rates.     

An analysis of the behavior of mature black-owned commercial banks

Accounting and statistical techniques are used to compare the behavior of a sample of mature black-owned banks with that of a matched set of nonminority-owned banks. The black banks are generally less profitable. The major reasons for this lower profitability include more liquid asset portfolios at the black banks, higher operating costs on liabilities, and higher rates of loan loss. Higher loan loss rates appear to be the single most important factor, with losses on real estate and possibly commercial and industrial loans probably being the most serious continuing sources of loan losses.     

Market performance and the nature of a competitive fringe

It is sometimes argued that increasing the size of fringe firms in relation to market leaders will result in more competitive performance in the market. This paper tests the hypothesis that the number and size distribution of fringe firms in a market will affect overall market performance. The analysis is based on a sample of 3777 commercial banks located in 372 local markets during 1976–1980. Test results indicate that a competitively structured fringe of firms has a procompetitive influence on performance in the market. This implies that mergers between fringe firms are likely to have an adverse effect on competition rather than a procompetitive effect, as sometimes argued.     

Bank structure and mortgage rates: Implications for interstate banking

Competition in financial markets has been the subject of many studies in the area of market structure and performance. This paper analyzes the differences in mortgage rates between unit banking and branch banking states to consider the likely outcome of interstate banking on competition. A model of interest rate determination is developed which suggests that, at least in the mortgage market, interstate banking will, ceteris paribus, decrease competition if it lowers the number of competing firms and increases deposit concentration levels. Support is provided for the argument that only those states under statewide branching laws may receive more competitive environments from the spread of interstate banking.     

The valuation of subsidies in kind and their effects on costs

This study focuses on the effects of subsidies in kind on cost minimizing behavior and the resulting estimates of costs. It is shown that subsidies in kind may distort the usual equilibrium conditions and cost-output relationships among firms in the same industry. Even if they do not, the value of subsidized inputs to the firm, in terms of reduced costs, may differ from its market value. Methods are developed to cope with both problems, and estimations of the value and importance of subsidies in kind to the credit union industry are performed.     

Increases in energy prices,costs of production,and plant size

A translog cost function is estimated for U.S. manufacturing in order to investigate plant size differences in responses to increases in energy prices. Smaller plants were more intensive users of energy in the early 1970s but were also better able to substitute out of energy and into other inputs during the first round of energy price increases. As a result, by the mid-1970s larger plants had become more intensive energy users. Thus, later energy price increases probably had a greater adverse impact on the production costs of larger plants in manufacturing.     

Model of management learning styles as a predictor of export behavior and performance

This paper reports the findings of a preliminary investigation of the relationships between the export performance and behavior of firms and the search for market information by the principal international marketing executives of these firms. The first part of the study deals with acquiring objective market information, and the second part is concerned with the acquisition of experiential market knowledge. While the findings of the experiential portion are inconclusive, the use of learning theory in this aspect of the work provides direction for future research in this area.     

The economics of enforcement: The case of OSHA

A model of enforcement is developed that determines the impacts of OSHA actions on regulated parties. This model analyzes the effect of decision procedures developed by OSHA to enforce the law and their effect on resource allocation within the firm. It is concluded that the impacts from both the initial inspection and reinspection programs on the resource allocations of firms have likely been insignificantly different from zero. If OSHA is to increase the allocation of injury control resources of firms through its enforcement program, it must increase the costs of noncompliance that it imposes on firms.     

Bank holding company affiliation and contracyclical lending by mortgage bankers

Bank holding companies have made significant inroads into the mortgage banking industry, primarily by acquisition. Federal Reserve Board approval of acquisitions is contingent upon the expectation of net public benefits. This study analyzes one of the benefits that BHCs claim will arise from acquisition of mortgage bankers—the flow of funds into housing will become more cyclically stable. Test results on a 33-firm sample of independent and BHC-affiliated mortgage bankers for 1973–1975 provide little support for this claimed public benefit.     

Oil price shocks in a portfolio-balance model

In the 1970s oil price increases were often associated with downward pressure on the foreign exchange value of the dollar. In order to identify the factors generating this association, we examine an oil price shock in a portfolio-balance framework where a wealth transfer is generated by altered current account positions. We show that the exchange-rate impact of higher oil prices depends importantly on the asset prefernces of both oil importers and oil exporters, as well as exchange rate expectations, which are influenced by countries' abilities to adjust to higher oil prices.     

Sales expectations and inventory changes in retail trade

In this paper a single equation inventory investment model is estimated for the United States retail sector. Monthly data for the 1970s are utilized. In estimating the model it is alternatively assumed that expectations were formed according to a seasonal model, to perfect foresight, and to a narrowly rational expectations model. We find that a model in which expected sales and the expected rate of inflation are narrowly rational can explain most of the variation in retail inventory investment during the time period studied. The results of the estimation imply that retailers have a relatively short forecast horizon, that they can react quickly to either unexpected sales or to a deviation of actual from desired inventory stocks, and that an increase in the real of interest has a statistically negative impact on retail inventory investment.     

Adjustment costs and theory of investment under uncertainty

It is shown that the stochastic investment rule for the price-setting monopolist facing random demand differs from the deterministic rule, due to the presence of the covariance of the marginal utility of profits and the MRTS between capital and labor. For the risk-neutral quantity-setting monopolist, the optimal current investment under random demand is shown to be greater than that under deterministic conditions, given that production technology is of the Cobb-Douglas type with constant returns to scale. When random wages and prices follow first-order autoregressive schemes, the risk-neutral competitive firm's current investment level is shown to be at least equal to that under certainty.     

Scale economies,entry, and welfare

This study shows how scale economies, initial size differences among firms, potential competition, and adjustment costs may influence the entry of firms into a dynamic oligopoly. It also examines the effects of these factors on the final size distribution of firms in an industry, and on the welfare levels of consumers and producers. We find that low to moderate scale economies are insufficient for Cournot-Nash competition to drive small firms from the market. Only when scale economies are quite high will the distribution of firm sizes become degenerate. Potential competition and the size of incumbent firms' capital stocks are additional barriers to entry. The welfare conclusion is that there may be a government role to preserve potential competition, but also to dissuade small firms from entering certain markets where there are economies of scale.