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Byline: Tsai-Lien Yeh This paper analyses the market power of the Taiwan banking industry, by employing a dynamic economic error-correcting model. The main result is that banks are competitive and the degree of competition is stronger in the short run compared to the long run. Our empirical studies also show that the Taiwan banking industry increased market power after undertaking merger activities. Mergers can increase the size of banks, and large banks are more competitive. We also find that the dynamic Error Correction Model (ECM) analysis offers an appropriate method by which to study market power issues, while the static model, from the statistical perspective, seems inappropriate.

Byline: Tsai-lien Yeh Do mergers promote efficiency in the banking industry? A Data Envelopment Analysis in this study revealed that technical efficiency and productivity in Taiwanese banks increased more during the ex-post period (2003-2004) of the Merger Act than during the ex-ante periods (1999-2000). The empirical results of this study indicate that banks surviving mergers exhibited increased technical efficiency due to economies of scale, as proposed in earlier studies by Berger and Mester (1997). Further, productivity analysis documented a positive association between size of banks and productivity growth. Mergers can increase the size of banks, and large banks are better able to develop fee-based off-balance-sheet activities which can yield superior returns. Banks aggressively engaged in these outputs, they have higher productivity outputs.