Academic journal article The European Journal of Comparative Economics

Assessing Lending Market Concentration in Bulgaria: The Application of a New Measure of Concentration

Academic journal article The European Journal of Comparative Economics

Assessing Lending Market Concentration in Bulgaria: The Application of a New Measure of Concentration

Article excerpt

1. Introduction

The issue of the measures of concentration is a long-standing debate. The most frequently applied measure of concentration, at least in banking, is the Herfindahl-Hirshman Index (HHI). It is used, for instance, in studies focusing on the relationship between market structure and banks' performance, but also by banking authorities to examine the impact on competition of the eventual mergers and acquisitions (2). Despite its popularity, this concentration measure is much criticised. Its frequent usage is due to the fact that it is simple to calculate.

Another simply constructed concentration measure is the Entropy Index (EI). It was frequently applied to assess the industrial firms' strategy, and, to our knowledge, never to banking. The construction principle is the same as for the HHI, the weights attached to market shares are only different: HHI assigns higher weights to higher shares whereas the EI assigns to higher shares lower weights. Thus, both indexes are subject to "weight bias".

Many other measures have been proposed. Among them, market share inequality indexes of Rhoades (1995) reveal the inequality among firms even within markets with similar HHIs. Nevertheless, they are not exempt from some weaknesses. As Rhoades (1995) mentions, two of them are very sensitive about the number of firms, which increase rapidly with the increment in number of firms. Another inequality measure is the difference between the largest and smallest market shares. The latter concentration measure has, as other concentration measures, a weight bias, placing greater weight on larger market share differences.

Two of the market share inequality measures of Rhoades (1995) have been used by Hannan (1997) along with the inequality part of the HHI, in order to assess their effects on the bank deposit and loan rates. His results are inconclusive in explaining the deposit interest rates. For the loan-rate analysis, it arises that only the number of firms influences the small business loan rates.

Even if some transformations have been made, all these inequality measures are not completely exempted from the effect of the number of firms. An original research is that of Melnik et al. (2008) where the authors propose a dominance measure in order to disclose the firm with the dominant position. For this reason it has a limited interest for assessing the market concentration (3). Nevertheless, neither the inequality measures of Rhoades (1995) nor the dominance measure of Melnik et al. (2008) gauge the market concentration and so are not of interest in our study.

In our opinion, a concentration measure must not be influenced by the number of entities existing in the market, only the share they own should determine the market concentration. This could easily be corrected by the normalisation of the HHI and EI, as they take values between zero and one regardless of the number of firms on the market. However, the weight bias that characterises these concentration measures will always be present. As will be discussed below, this sensitivity on the weight attached to market shares makes different values for these two concentration measures and different rates of evolution, even if the sense of the evolution is the same. The measure we introduce in this paper avoids all weight problems.

Thus, this work presents a twofold interest. First, we propose a new methodology to estimate a concentration index that avoids any weight bias. It is based on the same approach as the Gini index and allows the determination of the shape of the Lorenz curve. We use this new measure to assess the sectoral lending concentration in Bulgaria. The market shares used are therefore the share of each economic activity in a lending portfolio. Thus, this new approach provides information on the loan distribution across economic sectors. The case of a small number of sectors receiving the most funding corresponds to what we call beta-concentration. …

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