Competition Tests with a Non-Structural Model: the Panzar–Rosse Method Applied to Germany's Savings Banks

Abstract. In this paper we adopt the Panzar–Rosse approach to assess the competitive conditions in the German banking market for the period from 1993 to 2002. We suggest several improvements to the empirical application of the approach and show that frequently used empirical models that apply price rather than revenue functions lead to biased results. Using disaggregated annual data from more than 400 savings banks (Sparkassen) the empirical findings indicate monopolistic competition, the cases of monopoly and perfect competition are strongly rejected. Furthermore, small banks seem to enjoy even more market power than larger institutions.