Efficiency, profitability and competition: empirical analysis for a panel of German universal banks
- This paper addresses the question to what extent profitability differences and market share dynamics can be explained by firm-specific efficiency. In a first step, individual efficiency is identified using two different cost frontier techniques - the fixed effects and the stochastic frontier approach. In a second step, the relationship between efficiency and the performance variables profitability and market share dynamic is estimated. This relationship is closer in markets where firm behaviour is more competitive. Based on a panel of 1425 German universal banks, the study indicates surprisingly strong differences between the analyzed groups: Profitability is significantly determined by efficiency components for cooperative banks, whereas for savings banks and credit banks the explanatory power is small. However, short- and long-run declines in market shares because of deviations from the "best practice technology" could be observed only in the savings banks group.
