Bank Pricing under Oligopsonistic-Oligopoly: Evidence from 103 Developing Countries

Abstract

We propose a generic oligopsonistic-oligopoly model to study bank behavior under uncertainty in developing countries. We derive a pricing structure that acknowledges market power on both the deposit and loan market and identify two theoretical components to the loan rate: a rent extraction component resulting from the interaction between the choke price on loans and the prevailing banking structures, and a mark-up on deposit funding costs that captures the transformation efficiency of financial intermediation. We then test our structural specification using longitudinal data for 103 non-OECD countries and find that both market structure under uncertainty and the deposit rate matter significantly in pricing. However, the role played by the rent extraction share in pricing dominates, on average, funding costs in developing countries, underpinning the importance of market structure in bank pricing power.