Deregulation, competition and consumer welfare in a banking market: evidence from Hong Kong

This paper examines competition among commercial banks following deregulation in a small open economy. I jointly estimate a system of differentiated product demand and pricing equations, and use conduct parameters to identify market structure. Overall, I find positive outcomes for the banking deregulation, which suggest that the benefits of deregulation understood in large industrialized economies indeed apply to a small open economy. Encouragingly, the industry becomes more competitive and the consumers are better-off after the deregulation. Empirical results also indicate that the banking sector is characterized by non-cooperative competitive behavior. Bank size is an important determinant of consumer’s bank choice.