Market power and merger activity in Taiwan banking

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.