Assessing whether a hypothetical bank merger will affect market competition depends crucially on the size of the market in question. A study forthcoming in the Federal Reserve Bank of New York’s Economic Policy Review applies a new approach to measuring banking market size and concludes that banking markets, at least in northeast states, are not necessarily local, as traditionally supposed.
In Local or State? Evidence on Bank Market Size Using Branch Prices, economists Paul Edelstein and Donald P. Morgan note that expanded branching options enable banks to compete across entire states, suggesting that the local—such as city or county—concept of banking markets warrants reconsideration.
The authors contend that branch prices—the amount a bank pays to buy another bank’s branches—may be a better indicator of market size than the measures relied upon by other analysts. They find that prices for bank branches in ten northeast states depend more on competition at the state level, suggesting that banking markets, at least in the northeast, are not necessarily local.
Paul Edelstein, formerly a research associate at the Federal Reserve Bank of New York, is a graduate student in economics at the University of Michigan; Donald P. Morgan is a senior economist at the Federal Reserve Bank of New York.