Measuring multi-product banks' market power using the Lerner index

Sherrill Shaffer, Laura Spierdijk

Research output: Contribution to journalArticleAcademicpeer-review

3 Citations (Scopus)
2 Downloads (Pure)

Abstract

The aggregate Lerner index is a popular composite measure of multi-product banks’ market power, based on total assets as the single aggregate output factor. We show that the aggregate Lerner index only qualifies as a consistently aggregated Lerner index if three conditions hold. Under these conditions, the aggregate Lerner index reduces to a weighted-average of the product-specific Lerner indices. We test the three conditions for a sample of U.S. banks covering the years 2011–2017. All three conditions are rejected and we show that they may cause an economically relevant bias to the aggregate Lerner index, depending on the economic context. As a general solution, we propose using the always consistently aggregated weighted-average Lerner index whenever a composite Lerner index is needed.
Original languageEnglish
Article number105859
JournalJournal of banking & finance
Volume117
DOIs
Publication statusPublished - Aug 2020

Keywords

  • Lerner index
  • Multi-product banks
  • Market power
  • Cost functions

Cite this