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Revisiting market power and efficiency: the non-linearities over profitability

Abstract:

Market power and efficiency are known to affect baking profitability. However, they have been usually analysed separately and when jointly, under a linear approach. This letter proposes a non-linear assessment of these two variables over bank profitability. For this, we use a GMM approach and find diminishing returns of market power and increasing returns of efficiency over profitability gains. Our findings add evidence besides the traditional view which may have important implications for banking system.