Multimarket Contact in Banking

According to linked oligopoly theory, the anticipated effect of multimarket contact is reduced competition. Specifically, the theory predicts that contact lowers competition by reducing the benefit of aggressive action in any single market by providing rivals with the opportunity to retaliate in multiple common markets. The results of this paper are consistent with the theory. In banking, contact is positively related to profitability. Although the economic impact of this relationship is unimportant for most institutions, the relationship is meaningful for the small group of banks most heavily exposed to contact. This finding suggests that the importance of contact may rise as consolidation of the banking industry continues.