This study extends the existing empirical evidence, which suggests that the degree of bank competition may have a significant effect on both the level of bank rates and on the pass-through of market rates to bank interest rates. Understanding this pass-through mechanism is crucial for central banks. However, most studies that analyse the relationship between competition and banks’ pricing behaviour apply a concentration index such as the Herfindahl-Hirschman index (HHI) as a measure of competition. We question the suitability of such indices as measures to capture competition. Where the traditional interpretation is that concentration erodes competition, concentration and competition may.
