Deregulation, Entry, and Competition in Local Banking Markets

By applying the Bresnahan-Reiss empirical entry threshold model on Census data for the waves 1981 to 2011, we study the evolution of entry conditions in Italian local banking markets under a long-run perspective in order to capture the consequences of the removal of branching restrictions that occurred in the early 1990s. We do not find evidence of collusive behavior among local banks; instead, competition seems to have increased with respect to the number of banks and through the years—even if banks’ variable profits have risen over time. Overall, banks appear to have responded to the growing competition through the adoption of non-price strategies.