Competition in the banking sector has been analysed by, amongst other methods, measuring market power (. a reduction in competitive pressure) and efficiency. A well-known approach to measuring market power is suggested by Bresnahan (1982) and Lau (1982), recently used by Bikker (2003) and Uchida and Tsutsui (2005). They analyse bank behaviour on an aggregate level and estimate the average conjectural variation of banks. A strong conjectural variation implies that a bank is highly aware of its interdependence (via the demand equation) with other banks in terms of output and prices. Under perfect competition, where output price equals marginal costs,.
