This study explores whether the concentration–stability relation is affected by the level of analysis; i.e., bank-level versus country-level stability. The diverging results in the literature suggest that we may indeed expect differences between the two levels. With the z-score as the measure of financial stability, our theoretical analysis confirms that we may find such differences. Yet our empirical analysis for the EU-25 during the 1998–2014 period finds no economically significant effect of concentration on either the bank-level or the country-level z-score. The finding that concentration hardly affects stability at both levels of analysis is an indication of robustness in the empirical concentration–stability relation not previously established in the literature. This finding further suggests that neither supervisory restructuring, nor normal market-driven mergers, are likely to be substantially harmful to financial stability.

The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on total assets as the single aggregate output factor. We show that the aggregate Lerner index only qualifies as a consistently aggregated Lerner index if three conditions hold. Under these conditions, the aggregate Lerner index reduces to a weighted-average of the product-specific Lerner indices. We test the three conditions for a sample of U.S. banks covering the years 2011–2017. All three conditions are rejected and we show that they may cause an economically relevant bias to the aggregate Lerner index, depending on the economic context. As a general solution, we propose using the always consistently aggregated weighted-average Lerner index whenever a composite Lerner index is needed.

The Panzar–Rosse H statistic is a commonly used measure of market power in banking. It is widely believed that H extgreater0 is inconsistent with significant market power. This study rigorously disproves that perception. Instead, the possibility of H extgreater0 under conditions of substantial market power turns out robust to the timing of banks’ actions, relative costs, choice of strategic variable, degree of product differentiation, strategy (static or dynamic), and degree of heterogeneity in banks’ conduct (collusive versus fringe), and hence may be common in practice.

Chung and Cox (1994) provided an intuitively appealing stochastic model indicating that superstars may exist regardless of talent, giving rise to the Yule distribution. We adopt a different empirical approach and test its goodness of fit using a parametric bootstrap and several powerful test statistics. Just like the discrete Pareto distribution, it is overwhelmingly rejected: it is a fairly accurate approximation of the lower quantiles of the superstar distribution but overestimates the snowball effect that makes consumers purchase records of the most successful artists. In other words, the Yule distribution captures stardom, but not superstardom. A generalization of the Yule distribution provides an excellent fit in two of the three data sets.

The Panzar-Rosse test has been widely applied to assess competitive conduct, often in specifications controlling for firm scale or using a price equation. We show that neither a price equation nor a scaled revenue function yields a valid measure for competitive conduct. Moreover, even an unscaled revenue function generally requires additional information about costs and market equilibrium to infer the degree of competition. Our theoretical findings are confirmed by an empirical analysis of competition in banking, using a sample containing more than 100,000 bank-year observations on more than 17,000 banks in 63 countries during the years 1994 to 2004.

The 2000–2013 period was characterized by substantial regulatory, monetary and technological change, especially after the onset of the global financial crisis. This study assesses the total impact of these policy shifts and technological changes on U.S. commercial banks’ short-run and long-run substitution elasticities. An endogenous-break test divides the sample into a pre-crisis period and a (post-) crisis period. During the former period, banks’ inputs tend to be inelastic substitutes. After the onset of the crisis, particularly the long-run substitutability of most input factors decreases to even lower levels due to changes in both cost technology and economic conditions. At the same time, banks’ response to input price changes becomes more sluggish. Hence, especially after the onset of the crisis, banks have little flexibility regarding input factor usage and are thus sensitive to input price changes from a cost perspective.

The quiet life hypothesis posits that firms with market power incur inefficiencies rather than reap monopolistic rents. We propose a simple adjustment to Lerner indices to account for the possibility of forgone rents to test this hypothesis. For a large sample of U.S. commercial banks, we find that adjusted Lerner indices are significantly larger than conventional Lerner indices and trending upward over time. Instrumental variable regressions reject the quiet life hypothesis for cost inefficiencies. However, Lerner indices adjusted for profit inefficiencies reveal a quiet life among U.S. banks.