The relationship between market structure and performance has been studied extensively for foreign banking. Two explanations of the positive correlation between profitability and concentration have been advanced, the market power hypothesis (MP), which proposes that increased concentration prospers collusion and results in monopolistic profits, and the efficient-structure hypothesis (ES), which suggests that the most efficient banks obtain greater profitability and market share, and thus results in a more concentrated market.In contrast, little work has been done to investigate the relationship between market structure and performance for Chinese banking. This dissertation applies a model proposed by Berger (1995) to test the relationship between market structure and performance for Chinese banking industry. The result obtained supports neither MP hypothesis nor ES hypothesis. Moreover, We find that market structure, i.e., market concentration and market share, have no statistically significant relationship with the profitability. The main reason is that the special institution in China have produced the administrative monopoly. The special institution and the administrative monoply result in the irrational behavior of commercial banks, especially of the state-owned commercial banks, which breaks off the relationship between the market structure and performance.To resolve this problem, we should base on the banking system reform and take measures to break the administrative monopoly, increase competition and establish an efficient market structure of commercial banking in China. The purpose is to improve efficiency and take progress in performance by market structure.
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