Theoretical relationships between market structure and bank performance - Essay Example

Besides, most banking institutions are failing to engage with customers due to the rising competition from other customers. As opposed to this, it remains the duty of the bank to re- arrange itself in order to beat the other competitive banks in the market. For instance such a bank needs to sell its services well to its potential clients outside through sales representatives ( Gutek, Barbara, & Theresa, 2000). The market structure is normally very sensitive for any institution to sell its services to the publics.

The banking institutions at time sell customer products and services they do not comprehend. This makes it easier for banks to really charge these services rather than focus on customer needs which is the most important aspect in the market. High concentration in market encourages organizations to collude. A bank in a more concentrated market will earn higher profits than a bank operating in a less concentrated area ( Etro,2009). In order a bank to know the relation that exists between market structure and their performance it should employ or investigate the effects that are caused by changes in the structure or formation of the market.

There are two theories that are used to explain how a bank can determine its profitability and understand better its relation with the market structure. They are namely; the structure-conduct- performance (SCP) and the efficient-structure (E-S) hypotheses. The bank will also use the following measures to evaluate the banks performance; return on asset (ROA), return on capital and return on capital ( Baligh, 1997). Structure-conduct-performance theory Structure-conduct -theory determines the degree of a firn’s performance.. Most banks may therefore end up in lobbying in order to stop or delay the success of any competitive policy.

The market power may however be lost if banking institutions establish non-competitive prices in their products and services. This theory mainly uses market share to measure efficient structure hypothesis. This hypothesis is negatively related with profitability. Market power is the ability of a company to control the prices in the market by manipulating the demand or the supply of goods and services or both. The ability of a company to control prices can have a negative effect on the bank performance due to lower interest rates that will have to be charged on the clients when acquiring loans from the commercial banks.

This is due to monopoly in provision o services and goods which money supply low ( Etro,2009). “Quiet life hypothesis” indicates that the banks tend to enjoy the market power through foregone revenues and the savings on the costs, while the “efficient structure hypothesis” describes companies are able to make bigger profits into the company than their competitors due to maximum efficiency and not sales or provision of services.