Competitiveness and Market Contestability: An Empirical Assessment of the Banking Industry in Kuwait

Abstract

On the basis of the non-structural Panzar-Rosse (PR) approach and computing the robust H-statistic, this paper examines the degree of competition within the Kuwaiti banking industry. Employing panel data on banks covering the period 2000-2007, three different regression methods (ie, pooled OLS, GLS, and fixed-effects) are used to estimate a reduced-form revenue equation model. The results obtained show that the banking market in Kuwait is contestable, and that during the period 2000-2007 the Kuwaiti banks earned their revenues as if operating under conditions of monopolistic competition. In contrast to evidence found in an earlier study, the paper finds no evidence to support that the Kuwaiti banking industry operates under perfect competition. In light of the current results, it is presumed that the desire to obtain economies of scale and scope is the driving force behind the preference for larger sized banks.