Comparing market power, Cost Efficiency and Conjectural Elasticity of Iran's Banking Sector: Pre and Post Banking Sanctions

The main purpose of this paper is to determine the monopoly power of Iran's banking sector pre and post banking sanctions based on Conjectural Variation approach. In this study, for assessing the market power, generalized model of Azzam and Lopez (2002) is used which is based on the New Empirical Industrial Organization. Using panel data and two-stage least squares method, Supply and demand equations are examined. In order to estimate the selected model, macroeconomic variables and balance sheet data of 33 banks have been applied for 1380 to 1393 periods. The results suggest that the extent of market power has dropped from 0.05 to 0.02 by imposing the sanctions. Also, cooperative behavior among banks has been decreased. The results of analysis indicate the price elasticity of loan demand was 0.81 before sanctions and reduced to 0.16 after sanctions because of efficiency reduction of financial markets that shows the sanctions lead to loan demand became more inelastic. Also after the sanctions, the absolute value of cost efficiency of Iranian banking systems reduced.