Chapter 6: Competition between Profit Seekers and Non-Profit Firms: The Case of German Banking
6. Competition between proﬁt seekers and non-proﬁt ﬁrms: the case of German banking Manfred Neumann, Richard Reichel and Jürgen Weigand 1 INTRODUCTION In most industrialized countries non-proﬁt ﬁrms (NPs) account for a substantial share of economic activity. In many cases they are competing with proﬁt-seeking ﬁrms. In the present economics literature NPs tend to be viewed to be less eﬃcient than proﬁt-seeking ﬁrms. Thus, NPs are frequently predicted to be doomed to failure. So far, this prediction has not come true, however. An outstanding example is the banking industry in Germany. It rests on three pillars: proﬁt-seeking commercial banks, cooperative banks seeking to foster the economic well-being of their members, and non-proﬁt-seeking public sector banks (local savings banks, federalstate central banks, and development banks) obliged by law to pursue common goals. In the present chapter we wish to examine the competitive interplay of these banks and evaluate their economic performance and ability to survive. The chapter is organized as follows. In section 2 we brieﬂy discuss the characteristics of the German banking sector. The diﬀerent pillars also reﬂect diﬀerent ownership and governance structures. The interesting question is how these diﬀerences in the underlying goal of a bank, namely proﬁt maximization vs. furthering the common weal, as reﬂected in the banks’ governance approach impact the market outcome. Therefore, section 3 presents a Cournot-type model of competition between proﬁt-seeking and non-proﬁt-seeking banks. We show...
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