The Importance of Specialization Rank for Financial Conglomerates in Oligopolistic Competition: Theory and Evidence

Abstract

By measuring financial conglomerates’ degree of specialization in each of four main business areas, we hope to see whether being a specialist in a particular business area relative to direct competitors (having a high specialization rank) results in increased net income. Looking at data from US, Chinese and Japanese oligopolistic banking markets for the period 1998-2014, we find that being more specialized than direct oligopoly competitors has a positive effect on revenue performance in Fee and Commission-based Activities in all three country markets and in Interest-based Activities in US and Chinese markets. In Trading Activities for the US, specialization rank has a negative effect on performance and in Insurance Underwriting, the degree of specialization relative to competitors (specialization rank) has no explanatory power on net income. We also create a theoretical model under the premise that profits depend on specialization rank, and where the profit maximizing firm makes assumptions about how other players in the oligopoly setting will specialize before determining their own degree of specialization in each business area. We use this model to see how changes in competitors’ specialization choices would affect a bank’s own specialization decisions.