Alessandra FerrariUniversity of Reading

Very interesting paper, unique dataset; Product differentiation, C.V. analysis

(NEIO) with endogenous risk; Neat modelling of risk: it affects L and it

is endogenous: banks choose rL, rD, γ, B; Exclusion of risk causes bias in inference

on competitive dynamics; C.V. are function of MS and CR (Hannan,

S.C.P.); Interesting, largely consistent results.

V. ambitious, risks to miss the focus and aim.

2 main problems

1. Lost advantage of paper in analysis of competition;

2. Possible specification bias;

Main advantage is the effect of risk on the dynamics of competition: not analysed.Instead analysis of C.V. jumps into SCP, but incompletely: different roles of CR and MS, functional form, interaction, structure vs efficiency etc. Why? How are results consistent?

Possible bias due to omission of time effects or a macro effect (exogenous demand shifter) (GDP, reliance on banking, Euro…?). Explains:Rivals’ branches elasticity εd

BR > 0 call it β1

you get β1 + β2β12 with β2 and β12 > 0

Similarly for εLγ < 0 and εL

γR <0 and very large:

large negative bias due to effect on denominator of γ.

Intercepts in equations; Branch competition at the local level rather

than country level? Coefficients on the C.V. determinants (α, β)

have the same interpretation for loans and deposits: they model expected reactions (collusive or not), not how that r enters the profit equation.