A Mathematical Explanation of Panzar-Rosse Model and its Implication in Indian Banking Industry

Abstract

Various studies on competition in Banking sector have used Panzar- Rosse model to test its competitiveness. But none of the research paper have investigated the mathematical model and its implication. This paper mainly aims at proving the P-R model through simplifying the mathematical derivation and discussing its implication by taking Indian Banking Sector as a case. This model has been tested using a very popular method, i.e., Panel Corrected Standard error (PCSE) model. On the basis of estimated Panzar – Rosse H-statistics, it is concluded that the public sector banks and foreign banks have relatively more monopoly power thank private sector banks and hence Indian private sector banks are seems to be more competitive than others. After taking all the banks of the sector, it is found that Indian banking sector is almost close to the market structure of monopoly.