Assessing competition in the private banking sector in Ecuador: an econometric approach with the Panzar-Rosse model.

Abstract

This paper assesses empirically the competitive conditions in the private banking sector in Ecuador from 2000 to 2015. First, we measure the competition in the private banking sector, using the Panzar-Rosse H-statistic by the total revenue equation; we apply POLS, year fix effects, bank fix effects, and random effects. Second, we determine whether there is equilibrium in the long run in this sector by ROA regression equation and finally we aim to identify evidence of economies of scale in the private banking sector. In this path we analyze three different panels, 2000 – 2015, 2000 – 2006 and 2007 – 2015. The main results indicate that private banks in Ecuador operate under monopolistic competition. In addition, this competition increased during the 2007 – 2015 period; other result shows that there is no equilibrium in the long run for this sector. Finally, there are not economies of scale, therefore we can argue that small banks do not operate with disadvantages compared to medium and large banks.