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The Determinants and Trends of the Dynamics of Market Concentration: The Case of Deregulating Private Banking Industry in India

Extant studies treat the impact of entry on concentration and market structure mechanically; with some going further to naively identify fall in concentration as the cause of competition. It is the intention of this paper to critically examine these contentions by studying trends and determinants of the dynamics of market concentration with a view to gain an insight into the limitations of these extant approaches. Deregulation of domestic private banking industry in India, since early nineties, provides an opportunity for such a study. This paper is the first of its kind to identify a distinct pattern of change in the concentration ratio and explains its determinants in terms of a cubic form equation. The determinants of Herfindal's Concentration Ratio are - number of firms, average asset size of the firms and their skewness. The process of competition is explained through the empirics and analysis of the estimating equation. The study also points out to a possible generalised pattern that market concentration follows upon deregulation of industry.