*We thank two anonymous referees, an editor, colleagues and seminar participants at various universities, the Econometric Society Meetings (Buenos Aires) and the National Bureau of Economic Research (Summer Institute meetings) for helpful comments. Anand gratefully acknowledges the financial support of the Division of Research at Harvard Business School. Galetovic gratefully acknowledges the financial support of Fondecyt (project C1970340), Fundación Andes, the Hewlett Foundation and the Mellon Foundation.
RELATIONSHIPS, COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS*
Article first published online: 6 JUN 2006
The Journal of Industrial Economics
Volume 54, Issue 2, pages 151–199, June 2006
How to Cite
ANAND, B. N. and GALETOVIC, A. (2006), RELATIONSHIPS, COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS. The Journal of Industrial Economics, 54: 151–199. doi: 10.1111/j.1467-6451.2006.00279.x
- Issue published online: 6 JUN 2006
- Article first published online: 6 JUN 2006
It is well known that competition can destroy incentives to invest in firm-specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non-exclusive relationships, competition from arm's-length intermediaries, non-price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar-sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.