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Bastiaan Overvest

Most economists agree that effective banking competition contributes to affordable and innovative banking services. More controversial is how to measure banking competition. A frequently used approach is the conduct parameter (or conjectural variations) method. Applications of this method make no structural distinction between financial products and non-financial products. Yet financial products such as mortgages, consumer loans and SME loans are quite different from non-financial products – an interest rate is not “the” price of a loan. The chapter adjusts the conjectural variations model to a net present value setting to explicitly take characteristics of financial products into account. It shows that the adjusted method tends to yield lower estimates of the degree of competition than the standard static non-financial method. The question of how to reliably measure banking competition remains open.