Schumpeterian competition and efficiency among commercial banks

In this paper, we aim to fill the gap in the banking literature by quantifying the impact that the Schumpeterian competition mode – i.e. competition through the launch of new products (or new varieties of products) – has on the cost and profit efficiency of a sample of commercial banks based in the United Kingdom. We estimate both a cost and an alternative profit frontier on an unbalanced panel of UK commercial banks over the period 2001–2012. The intensity of competition through product innovation is proxied by the trademark intensity (i.e. the ratio between the number of trademarks registered in a given year by all the commercial banks – net of the trademarks registered by the bank under observation – and the employment in the sector) in the commercial banking sector. Our results show that the (lagged) trademark intensity in the commercial banking sector does affect negatively the mean cost and profit efficiency in the sector but there is evidence that as trademark intensity increases in the sector, commercial banks react by improving their cost and profit efficiency.