Market Concentration and Uniform Pricing: Evidence from Bank Mergers

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In recent years there has been considerable debate about the economic impact of rising levels of market concentration across many industries. In this paper, we focus on the US deposit market.

Greater market concentration is usually associated with lower deposit rates. As a result, anti-trust authorities tend to block mergers and acquisitions that could significantly increase concentration in local markets. However, we don’t find that deposit rates necessarily decrease after a merger, even in areas where the merger implies a large increase in concentration. This result can be explained by uniform pricing: banks tend to set very similar deposit rates across their branch networks despite local conditions.

We show that after a merger, the deposit rates of the acquired branch and the median deposit rate of the buyer converge. This can result in either an increase or a decrease in the deposit rates of the acquired branch. We also compare the impacts of the pre-merger rate difference and the potential  increase in concentration after a merger. We find that the differences in the rates before a merger predict the direction of the rate adjustment, while the size of the adjustment depends on the potential increase in concentration due to the merger. So, we find some mergers where concentration increases a lot but deposit rates go up, and other mergers where concentration does not increase and deposit rates go down. Therefore, to analyze the impact of mergers on deposit rates, we must look not only at potential changes in market concentration, but also at the differences in rates before a merger.