Testing the Impact of Mergers on Bank Competition

22 April 2019
Prof. Dr. Marc Ivaldi with Professor Vittoria Cerasi, Bicocca University, and Professor Barbara Chizzolini, Bocconi University

In this article, published in Economic Notes, April 2019, Prof. Dr. Marc Ivaldi joins Professor Vittoria Cerasi of Bicocca University and Professor Barbara Chizzolini of Bocconi University, to discuss their newly proposed test, which evaluates the impact of horizontal mergers on competition in the banking industry.

The test is designed to be applied ex ante to potential mergers, while being parsimonious in terms of data, as it only uses information on branches in local markets. The test is a counterfactual exercise based on a two‐stage model where banks compete in branching and interest rates. It requires comparing the estimated degree of competition in the status quo, where branching networks by banks are those actually observed, with a counterfactual scenario, where the branching network of the new entity is the sum of the branches of the banks involved in the horizontal merger. The statistical difference between the two estimated measures of competition quantifies the impact of the merger. In the article, the authors apply their test to French and Italian mergers.