Efficiency, Concentration and Competition in the Turkish Banking Sector

The collusion hypothesis in the Structure-Conduct-Performance (SCP) approach assumes a negative relationship between concentration and competition. The efficient structure hypothesis asserts a positive relationship between efficiency and competition. Both of these traditional approaches to industrial economics imply that markets cannot be simultaneously concentrated and competitive. Recently, the new empirical industrial economics (NEIO) approach proved that competition may exist in markets even when concentration is high. Although the links among competition, concentration and efficiency have been established by these approaches at a theoretical level, the direction of causality among these variables remains as an empirical question to be addressed. Thus, this study aims to empirically explore the direction of the relationship among concentration, efficiency and competition employing the Panzar and Rosse (1987) model and Data Envelopment Analysis (DEA) methods to the Turkish banking sector over the period of 1990-2011. Contrary to the predictions of the SCP approach, the findings of this study reveal that the level of efficiency increases in the sector as long as the level of competition increases in the market.