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Wilko Bolt and David Humphrey

In this chapter, the authors test the ability of competition measures to distinguish between relatively high and low prices in four bank service lines: business and consumer loans plus savings and small time deposits. The HHI and H-statistic often do not do better than random chance. A Mark-up (an approximate Lerner index) or a frontier competition measure does better. The HHI is not predictive of realized price conduct and should not be used to assess or reject bank mergers. The challenge is how to use other measures to augment or replace the HHI in bank merger policy.