Consolidation and competition. The case of the Argentine banking industry

The Argentine banking industry has experienced increasing consolidation during the last decade. On the one hand, it can be argued that this has resulted from cost economies, perhaps associated with technical change. But on the other, it can also be argued that increased concentration in this industry may allow the exploitation of market power in the input (deposits) and output (loans) markets. These issues are addressed in this study using bank-level data for Argentine retail banks over the period 1993-2000 to estimate a cost-function based model incorporating deposits- and loans-market pricing behaviour. The results provide evidence of market power in both the market for loans and deposits and also the presence of significant cost economies, which vary over time. The findings also show an increase in consumersí surplus and banksí profits over the period but suggest the potential for additional benefits to consumers from a reduction of market power or a further expansion of bank activity level.