Managing the endogeneity problem of the market structure: a study on banking competition

Tri Mulyaningsih (Faculty of Economic and Business, Sebelas Maret Surakarta University, Surakarta)
Anne Daly (Faculty of Business, Government and Law, University of Canberra)
Riyana Miranti (National Centre for Social and Economic Modelling, University of Canberra)

Economic Journal of Emerging Markets
Volume 7 Issue 2, 2015

Recent literature suggests that the market structure is an endogenous variable that is determined by a firm’s behaviour and the competitive environment of the industry. This study examines the relation between the market structure and the banks’ behaviour in Indonesian banking by considering the endogeneity problem of them as variables. The estimations using the Vector-Error-Correction approach suggest that the structural approach provides a valid prediction of the relationship between market structure and bank behaviour by recognizing the endogeneity issue between those two variables. The banking industry would be more competitive if the market was less concentrated.