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The Antitrust Bulletin!Winter 1985

Multimarket interdependence and

performance in banking: two tests
BY STEPHEN A. RHOADES* and ARNOLD A. HEGGESTAD**

I. Introduction

The conglomerate form of business organization has become

commonplace in American industry during the postwar era. This
phenomenon first attracted widespread attention during the con-
glomerate merger movement of the 1960s when companies like
ITT, Litton Industries, LTV, et al., were frequently making
business page headlines with their dramatic acquisition pro-
grams.' Because of the size and significance of this movement and
its effect on the organization of American industry, questions
were raised regarding the implications of the conglomerate form
for market competition. As early as 1955, Corwin Edwards had
addressed this issue in a well-known paper in which he contended
that conglomerate firms, as a result of their size and diversified
structure, would cause reduced competition in the various mar-
kets in which they operate.2 Edwards' article, and the conglomer-
ate issue in general, have been a source of controversy ever since.

* Financial Structure Section, Federal Reserve Board, Washing-

ton, D.C.
University of Florida, Gainesville, Florida.
AUTHORS' NOTE: The views expressed herein are the authors' and do not
necessarily reflect the views of the Board or its staff. I thank Patricia
Warren and Cecilia Hurt for fine typing.
I Many of the issues raised are discussed along with anecdotal and
empirical evidence in Stephen A. Rhoades, Power, Empire Building,
and Mergers (Lexington, Mass.: Lexington Books, 1983).
2 Corwin Edwards, "Conglomerate Bigness as a Source of Power,"
Business Concentration and Price Policy, ed. G. Stigler (Princeton:
Princeton University Press, 1955), pp. 331-59.
0 1986by Federal Legal Publications, Inc.

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The reason for this is that the competitive effect of diversified

firms is essentially an empirical question, and there has been
scant general evidence regarding the competitive effects of diver-
sification. 3
One of several hypotheses that emerge from the broad con-
glomerate power hypothesis of Corwin Edwards is that of mutual
forbearance or linked oligopoly. The hypothesis holds that when
conglomerate firms meet one another in many markets, they will
become aware of their multimarket interdependence and tend to
avoid aggressive behavior in each market for fear of retaliation in
some other market. This results in a generally reduced level of
rivalry even in markets that have a relatively competitive struc-
4
ture. Studies to date yield mixed results.

3 Stephen A. Rhoades, "The Effects of Diversification on Industry

Profit Performance in 241 Manufacturing Industries," Review of
Economics and Statistics, May 1973, pp. 146-55; Stephen A. Rhoades,
"A Reevaluation of the Effects of Diversification on Industry Profit
Performance," Review of Economics and Statistics, November 1974,
pp. 557-59; and Federal Trade Commission, Economic Report on the
Influence of Market Structure on the Profit Performance of Food
Manufacturing Companies (Washington, D.C.: U.S. GPO, 1969).
4 Results from an early cross-section analysis support the hypothe-
sis. See Arnold A. Heggestad and Stephen A. Rhoades, "Multimarket
Interdependence and Local Market Competition in Banking," Review of
Economics and Statistics, November 1978, pp. 523-32. Some case study
evidence supporting the hypothesis has been presented in the Federal
Trade Commission, Economic Report on CorporateMergers (Washing-
ton, D.C.: U.S. GPO, 1969), pp. 458-71. Results from a cross-section
analysis by David C. Whitehead of banking markets in Florida are
opposite of those predicted by the hypothesis. Mixed results are pre-
sented in a cross-section analysis of manufacturing by John T. Scott. He
found support for the hypothesis among low-concentration industries
but contrary results among high-concentration industries. See David C.
Whitehead, "An Empirical Test of the Linked Oligopoly Theory: An
Analysis of Florida Holding Companies," Proceedings from a Con-
ference on Bank Structure and Competition (Federal Reserve Bank of
Chicago, 1978), pp. 119-40; and John T. Scott, "Multimarket Contact
and Economic Performance," Review of Economics and Statistics,
August 1982, pp. 368-75.

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 Banking : 977

This study presents results of an empirical investigation of the

mutual forbearance or linked oligopoly hypothesis.' Two dif-
ferent approaches are used. The first approach modifies an
earlier study by Heggestad and Rhoades.6 Specifically, their study
used an indirect measure of market rivalry (mobility and turnover
among leading firms) as the dependent variable for testing the
hypothesis across 187 banking markets. This study uses basically
the same sample to test the linked oligopoly hypothesis but it
employs traditional performance measures (profits and prices) in
place of the rivalry measure in the original study and it extends
the earlier model. The basic purpose of this approach is to
determine whether the initial findings of Heggestad and Rhoades
hold up when the traditional performance measures are used
instead of rivalry measures.
The second approach uses a more recent sample and intro-
duces several refinements to the analysis. This involves: (1)
analyzing a more recent time period so that test results will better
reflect the many intermarket linkages that were being established
during the early years of the bank holding company movement-
the years covered by the earlier studies; (2) using Tobit analysis in
addition to OLS analysis to test for a relationship between
multimarket links and rivalry; (3) correcting for a bias in the
rivalry measure that appeared in the earlier study; and (4) using
traditional performance measures (profit and price), which were
not used in the first study, in addition to rivalry in testing for the
competitive effects of multimarket links.
Since the rationale underlying the use of the banking industry
and the expected relationship between multimarket links and
market competition was developed fully in the original paper by
Heggestad and Rhoades, it is not repeated here.

5 The term "linked oligopoly hypothesis" was first used by Elinor

Solomon in a theoretical discussion of this concept in connection with
banking. See Elinor Solomon, "A Linkage Theory of Oligopoly,"
Journalof Money, Credit and Banking, August 1970, pp. 323-36.
6 Heggestad and Rhoades, supra note 4.

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II. Approach #1: modifying an earlier study

As noted above, the first approach to testing the mutual

forbearance hypothesis uses the basic sample and covers the same
time period as the earlier Heggestad-Rhoades study. However, it
modifies their analysis by using performance measures rather
than rivalry measures for the dependent variable, and it includes
additional variables in the tests.
The sample includes 167 major banking markets (Standard
Metropolitan Statistical Areas, or SMSAs) that (1) were in exis-
tence over the entire period 1968-1974, (2) permitted the con-
struction of measures of intermarket contacts, (3) did not cross
state boundaries, and (4) were not in Alaska or Hawaii. All bank
financial ratios are averaged across the firms in a market to
obtain an approximation for the market.

Dependent variables

Five different performance measures are tested-one profit

rate, three price estimates, and one expense measure. The profit
rate measure is net income after taxes as a percentage of assets. 7
In order for this measure and the price and expense measures to
reflect the profitability, prices, and expenses of an SMSA, the
necessary data were obtained only for those banks in each SMSA
that derived at least 75 percent of their deposits from the SMSA. 8
The three price measures are (1) interest, discounts, and service
charges on loans as a percentage of total loans; (2) service charges

7 All income statement data are from the Income and Dividend
Report, December 31, and all balance sheet data are from the Report of
Condition, December 31.
8 Since the unit of observation is the market, i.e., performance
measures are the sum over the sample banks in the markets, portfolio
differences among banks do not pose such a serious problem for
comparing profitability as is the case when individual banks are the unit
of observation. Bank data meeting this criterion were not available for
20 of the 187 SMSAs investigated in the original analysis.

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 Banking : 979

on deposit accounts as a percentage of total demand deposits;

and (3) interest paid on time and savings deposits as a percentage
of total time and savings deposits. The expense measure is total
operating expenses as a percentage of total assets. All perform-
ance measures are averaged over the years 1968, 1970, 1972, and
1974.

Independent variables

The most important independent variable for purposes of this

analysis is the multimarket link variable. It measures the number
of markets throughout a state in which the five largest firms in a
market meet one another. It was described in detail in the earlier
study and therefore will be described very briefly here. The
following matrix is constructed for each of the 167 SMSAs in the
sample.
111112 . . .ll
121 122 . . .
131 . . . .

L=

15,....

where lmn (m 4 n) is the number of times that the mth largest

bank meets the nth largest bank in the markets throughout the
state. The matrix is symmetric, lmn = l.. The measure of contacts
or links is
4 5
Li = E lmn/N.
m=1 n=m+l

The sum of the off-diagonal terms in the upper triangle of the

matrix, L, is standardized among states by dividing the number
of actual contacts by N, the number of markets (i.e., possible
contact points) in the state. The link variable is based on the

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number of links between firms m and n when markets include all

SMSAs and non-SMSA counties. It is calculated for 1968 and
1974 and the simple average is used.
The other independent variables are intended to hold other
factors constant to isolate the effect of links. To account for the
basic structure of the market, a three-firm deposit concentration
ratio (CR3 ) is included as an independent variable. It is antici-
pated that the link and concentration variables will be directly
related to the performance measures.9 To account for an addi-
tional element of the competitive structure of a market, a com-
posite measure of nonbank thrift institutions is constructed by
summing savings and loan (S&L) association and mutual savings
bank savings deposits along with the assets of federal credit
unions in a market.'" This measure of nonbank thrift activity in a
market is divided by total commercial bank deposits to provide
an indication of the relative importance of thrifts. Competition
from these institutions should lead to relatively low bank rates of
return and prices.
A market growth variable is included, because if capacity
cannot be fully adjusted to rapid growth in the short run, growth
will have a positive effect on prices, profits, and expenses. It is
measured as the average annual deposit growth rate for the
period 1968-1974. Another attribute of markets that may affect
measured differences in price performance between markets is the

9 Because of the possibility that the effect of multimarket links on

profit performance will be more pronounced in low-concentration
markets than in high-concentration markets, the link and concentration
variables are tested in a regression equation that includes an interaction
term (CR, • L,). This did not have a notable effect on the results.
10 Due to data limitations, the thrift institution variable is calcu-
lated only for 1972. Only asset data are available for credit unions, and
SMSA data were not available until 1974. Data for state-chartered credit
unions are not available on an SMSA basis. Savings and loan associa-
tion data are obtained from a data file at the Federal Home Loan Bank
Board. Mutual savings bank data are obtained from a data file at the
Federal Reserve Board, and credit union data are from a printout
provided by the National Credit Union Administration.

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 Banking : 981

prevailing wage rate." The average wage rate is based on rates

constructed for three selected years-1968, 1972, and 1974-from
data on taxable payrolls and number of employees in banking.2
Relatively low wage rates should be reflected in relatively low
prices and operating expenses.
Four variables are included in the analysis to account for
possible differences in the asset and liability structure among
markets. Total loans to total assets is included because loans are a
major item in a bank's balance sheet and represent the major
alternative to holding government securities. If the banks in a
market hold a relatively large proportion of their assets in the
form of loans (as opposed to government securities), this suggests
relatively aggressive behavior by market participants. This im-
plies that a high loan ratio will be related to relatively competitive
profit and price performance but high expenses because of the
cost of making and administering loans relative to purchasing
and holding government securities. A capital/assets ratio is in-
cluded as an indicator of the aggressiveness of banks in a
market-those with a low ratio exhibiting a relatively aggressive
and risky posture. Because time deposits are an expensive source
of funds relative to savings deposits, the ratio of time to time and
savings deposits is included in the analysis along with a variable
to control for time and savings deposits as a percentage of total
deposits. It is expected that a high proportion of time deposits
will be associated with relatively low profits and relatively high
interest paid on time and savings deposits.
Finally, a variable is included to account for differing entry
conditions depending on whether a state permits statewide
branching, limited branching, or unit banking.

II The wage index variable is not included in the profit performance

equations because costs are accounted for in the basic construction of
the profit measure.
12 U.S. Department of Commerce, Bureau of the Census, County
Business Patterns (Washington, D.C.: U.S. GPO, relevant years). Since
the 1974 publication did not contain SMSA-level data, a county within
the SMSA was selected as representative of the SMSA.

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III. Approach #1: tests and results

As in the original study, a multivariate regression analysis is

used for testing purposes. The regression model is
Pi = f(L, CR3, LB, UB, G, T/T&S, T&S/TD,
NBT, TL/TA, TC/TA, W)
where
P, = IRL = interest, discounts, and service
charges on loans/total loans;
P2 = SCDD = service charges on deposit ac-
counts/total demand deposits;
P3 = IRTS = interest paid on time and sav-
ings deposits/total time and
savings deposits;
P, = RRA = net income after taxes/total as-
sets;
P5 = TE/TA = total operating expense/total
assets;
L = number of multimarket contacts between the
top five firms in a market when markets
include all SMSAs and non-SMSA counties;
CR3 = three-firm deposit concentration ratio;
LB = 1, if limited branching is permitted;
= 0, if otherwise;
UB = 1, if unit banking is required;
= 0, if otherwise;
G = average annual growth in market deposits,
1968-1974;
T/T&S = time deposits/time and savings deposits;
T&S/TD = time and savings deposits/total deposits;
NBT = savings of S&Ls and mutual savings banks
plus credit union assets/total time and sav-
ings deposits of commercial banks;
TL/TA = total loans/total assets;

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 Banking : 983

TC/TA = total capital/total assets;

W = taxable payroll in banking/number of em-
ployees in banking.

Results of the multiple regression analysis are presented in

table 1. While the model produces fairly high R2s for a cross-sec-
tion analysis of this type, the performance of individual variables
is not very impressive. Of particular interest is that the links (L)
variable is statistically significant in three of the four price and
profit equations. Specifically, the results indicate that a high level
of multimarket links is associated with relatively high interest on
loans (IRL) and high service charges on demand deposits (SCDD)
after controlling for the level of market concentration and other
factors. 3 These results are consistent with the hypothesis that
multimarket linkages of larger firms lead to a mutual interdepen-
dence across markets that yields less than competitive price
performance. However, results in the profit equation (RRA)
indicate that in markets where the large firms do have a relatively
large number of links (L) with one another in other markets,
profits are relatively low. This finding is opposite of the predic-
tion of the linked oligopoly hypothesis, and it is apparently not
due to higher expenses according to the results on the link (L)
variable in the expense equation (TE/TA).
Because of the conflicting evidence as to the effect of multi-
market links on price and profit performance, it is not possible to
accept the hypothesis that increased links result in decreased
competitive performance. It is clear, however, that this hypothesis
deserves further investigation for two reasons in addition to the
fact that the conglomerate form of business organization and the
resulting multimarket linkages have become a significant institu-
tional phenomenon in banking and the industrial sector. One
reason for further investigation is that there is apparently some
relationship between multimarket links and performance. Sec-
ond, even the concentration (CR3) variable, which has strong

13 Tests for nonlinearity in the relationship between the link varia-

ble and the performance variables provide no indication of a nonlinear
relationship.

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984 : The antitrustbulletin

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HeinOnline -- 30 Antitrust Bull. 984 1985

 Banking : 985

theoretical and empirical support," did not perform very well,

being significant in only one of the profit and price equations.
Perhaps the time period analyzed (1968-1974), which covered the
initial period of adoption of the holding company form and a
period of accelerating inflation, was sufficiently unique to distort
or obscure basic structure-performance relationships in banking.
The tests in approach #1, which is a modification of an earlier
study, yield conflicting results. They indicate that a high degree of
multimarket links is associated with relatively high prices but
relatively low profits. Unfortunately, these results do not permit
us to support or challenge the earlier Heggestad-Rhoades find-
ings that a high degree of linkage is associated with weak
interfirm rivalry. About all we can fairly conclude is that there is
apparently some relationship between links and performance but
the direction and meaning are not clear. Since the standard
concentration measure also performed very weakly, the time
period under investigation may have been unique. Because of this
possibility and the continuing growth of the diversified form of
business organization in banking and the industrial sector, further
investigation is appropriate. Such an investigation is pursued
below.

IV. Approach #2: a more recent time period and technical

refinements

Because of the internal inconsistency of the results in ap-

proach #1 and thus the failure to fully support or contradict the
earlier Heggestad-Rhoades study, a different time period, sam-
ple, and model are used to test the mutual forbearance hypothe-
sis. The model employed in approach #2 is developed largely
independently of that in approach #1. As a result, it does not
include identical variables partly due to data availability and
partly due to judgment.

14 Stephen A. Rhoades, A Summary and Evaluation of

Structure-PerformanceStudies in Banking: An Update, Staff Studies
no. 119 (Federal Reserve Board, August 1982).

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986 : The antitrust bulletin

The samples consist of 154 (210) banking markets (SMSAs),

which include 1,074 (1,443) banks, based on 1979 definitions.' 5
They include SMSAs (1) that did not experience a major defini-
tion change' 6 during the 1970s, (2) for which rivalry measures
could be constructed, and (3) that contained at least one banking
organization with offices in no other markets. Because this
analysis is based on multimarket linkages that existed as recently
as 1978, the results should reflect a relatively advanced stage of
the bank holding company movement which was the source of
many multimarket linkages that developed during the late 1960s
and early 1970s. All bank financial ratios are averaged across the
firms in a market to obtain an approximation for the market.

Dependent variables
Two basic dependent variables are used for testing purposes.
One is a rivalry measure that is used in order to permit compari-
son with the earlier "links" study by Heggestad and Rhoades.
The other is a traditional measure of market performance (profit
or price) in order to permit comparison with the modified version
of Heggestad-Rhoades as outlined in approach #1, above.

RIVALRY This dependent variable is intended to reflect both

price and non-price elements of interfirm rivalry in a market. It is
measured by the extent of "mobility" and "turnover," or churn-
ing about, in the deposit rank of leading firms.' 7 In connection
with such measures, Shepherd has observed:

15 Different samples are used to test the relationship between rivalry

and multimarket links and between performance and multimarket links
due to data availability, as noted later.
16 A major definition change was defined to be one that yields a
population change of more than 10 percent.
17 The rationale for using these measures and their application to
banking may be found in Arnold A. Heggestad and Stephen A.
Rhoades, "Concentration and Firm Stability in Commercial Banking,"
Review of Economics and Statistics, November 1976, pp. 443-52.

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 Banking : 987

Successful competition will-while it lasts-usually hold company

shares virtually constant. Such constancy may be used to infer
cooperation, even when direct evidence is lacking. Constancy may
also stem from vigorous but stalemated competition, as all competi-
tors strain and "succeed" equally. But such a running standoff is
relatively improbable. The greater the stability, the higher is the
probability that overt or covert cooperation exists; a churning among
the leading firms could suggest active competition, no matter how
monopolistic the structure seems to be."

Mobility is measured by summing over the time periods

1972-1974, 1974-1976, and 1976-1978, the number of times that
any of the top three (five) firms in a market changed rank
position. Turnover, which is designed to account for aggressive
behavior among lower-ranked firms, is measured by summing
over the same time periods the number of times that any firm
below the top three (five) moved into the ranks of the top three
(five).

PERFORMANCE Several different variables are used to reflect

market performance. In an attempt to measure price and profit
performance of banks so that it reflects the competitive condition
of a single market, the data used are for those banking organiza-
tions that derive all of their deposits from the one market.
Performance data are for 1,443 banks 9 located in 210 SMSAs
and that operate in only one market. 0 Ten-year average
(1970-1979) performance measures are calculated for each of the
1,443 sample banks2' and various independent variables are con-

18 William G. Shepherd, Market Power and Economic Welfare

(New York: Random House, Inc., 1970), p. 131.
19 These banks were required to have been in existence over the
entire period 1970-1979 so that long-run average performance measures
could be constructed.
20 Performance data are also calculated just for those 1,074 banks
(operating in only one market) that are located in the 154 SMSAs for
which rivalry measures could be calculated.
21 All of the performance variables are constructed from data from
the Report of Condition, Income and Dividend Report, and Summary
of Deposits Report, December 31.

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988 : The antitrust bulletin

structed for each bank to control for market financial charac-

teristics and market structure conditions facing the individual
bank.
There are four performance measures. The profit variable is
measured by net income after taxes and securities gains and losses
as a percentage of total assets. The other three performance
measures are proxies for prices. One is interest earned on loans as
a percentage of total loans. The second is service charges on
demand deposits as a percentage of total demand deposits. The
third is interest paid on time and savings deposits as a percentage
of total time and savings deposits.

Independent variables
Of course, the crucial independent variable in this analysis is
the measure of multimarket links, i.e., the number of times that
the leading firms in a market meet one another in other markets.
The method for calculating the link measure is the same as that
described in approach #1.
The remaining independent variables are intended to control
for financial statement, market condition, and regulatory dif-
ferences among markets. Five variables are included to account
for average balance sheet items for the banks in a market. 22 These
are included because each has the potential to affect measured
prices and profits and because each may vary among markets.
They are: time deposits/total time and savings deposits, total
loans/total assets, one-to-four family real estate loans/total
loans, loans to individuals/total loans, public deposits/total de-
mand deposits.23

22 The financial statement variables are only relevant in connection

with the performance variables since they may be expected to influence
prices and profits.
23 The public deposits measure is only used in the equations where
service charges on demand deposits and interest on time and savings
deposits are the dependent variables.

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 Banking : 989

Three variables are included in the analysis to account for

basic structural conditions facing market participants. The key
variable in this group is the three-firm deposit concentration ratio
(average of 1970 and 1979). Theory indicates that concentration
should be an important element of industry structure that will
influence prices and profits. Thus, results for the concentration
variable might be regarded as a rough indicator of the reliability
of the model and sample. A market size variable is included
because large markets should be easier to enter than small
markets." It is measured by total banking deposits in the market.
Also, because of implications for barriers to entry, market growth
(1970-1979) in terms of total bank deposits is included as an
independent variable.
The regulatory variables included in the analysis are dummy
variables distinguishing between unit banking, limited branching,
and statewide branching states. States with restrictive branching
laws inhibit the entry of established banks into new markets.
Thus, price and profit performance should be relatively high in
markets and banks located in the unit banking and limited
branching states.
It has been found that the rivalry variable has a measurement
bias in that in high-concentration markets, differences between
the market shares of leading firms are larger than the differences
in low-concentration markets. Thus, there tends to be higher
measured mobility and turnover in low-concentration markets
than in high-concentration markets. An attempt has been made
to control for this bias by including as an independent variable
the market share difference between the first and third ranked
firm in each market. Since this difference tends to be related to
market concentration, an interaction term involving the concen-
tration ratio and market share difference variable is included as
an independent variable.25
24 For an early test, see Willard F. Mueller and Larry G. Hamm,
"Trends in Industrial Market Concentration, 1947 to 1970," Review of
Economics and Statistics, November 1974, pp. 511-20.
25 See Stephen A. Rhoades and Roger D. Rutz, "A Reexamination
of the Relationship Between Concentration and Firm Rank Stability,"
Review of Economics and Statistics, August 1981, pp. 446-5 1.

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V. Approach #2: tests and results

Using the variables described above, the following models are

tested using ordinary least squares (OLS) regression analysis with
samples of 154 and 210 markets.
Ri= f(L, CR3, MS, MG, D, CR3 D, UB, LB)
Pi = f(L, CR3, MS, MG, UB, LB, T/T&S, TL/TA,
RRE/TL, LTI/TL, PD)
where
Ri = rivalry measures;
R, = RM 3 = mobility of top three firms
(1972-1978);
R2 = RT 3 = turnover of top three firms
(1972-1978);
R, =RMT3 = RM3 + RT3 ;
R, = RM, = mobility of top five firms
(1972-1978);
R, = RT = turnover of top five firms
(1972-1978);
R6 =RMT5 = RM + RT,;
Pi = performancee measures (annual average,
1970-1979);
P, = NI/TA = net income as a percentage of
total assets;
P2 = SCDD/DD = service charges on demand de-
posits as a percentage of demand
deposits;
P3 = IFL/TL = interest and fees on loans as a
percentage of total loans;
P, = ITS/TS = interest on time and savings de-
posits as a percentage of time
and savings deposits;

26 Because the values of the rivalry measures (mobility and

turnover) are concentrated at values of zero and one, with relatively few
observations above two, Tobit analysis is also used. As was the case with
an earlier study that used Tobit analysis in connection with this rivalry
measure, results based on Tobit analysis are essentially the same as those
based on OLS. Id.

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 Banking : 991

L = multimarket links adjusted for state size;

CR, = three-firm deposit concentration ratio;
MS = market size;
MG = market growth;
D = difference in market shares between Firms One
and Three (Five);
CR3 • D = cross-product term;
UB = 1, if unit banking is required;
= 0, otherwise;
LB = 1, if limited branching is permitted;
= 0, otherwise;
T/T&S = time deposits as a percentage of time and sav-
ings deposits;
TL/TA = total loans as a percentage of total assets;
RRE/TL = one-to-four family real estate loans as a per-
centage of total loans;
LTI/TL = loans to individuals as a percentage of total
loans;
PD = public deposits as a percentage of demand de-
posits.

For the sake of brevity, discussion of results will emphasize

findings on the links and concentration variables. Test results in
table 2 are based on rivalry as the dependent variable. Results for
the concentration variable (CR 3) indicate, in five of six equations,
that where concentration is high rivalry tends to be low. These
results in connection with the concentration variable, along with
those in table 3, are consistent with theory and the findings of a
great many structure-performance studies.27 This suggests that we
have reasonably good samples and data for testing the multi-
market links and rivalry or performance relationship. While the
concentration variable yielded the expected results, the multi-

27 The concentration-rivalry relationship holds up even after con-

trolling for the bias that should lead toward this finding. We have
controlled for this bias by including the market share difference (D)
between Firms One and Three (or Five). The variable (D) is generally
statistically significant and carries the expected negative sign.

HeinOnline -- 30 Antitrust Bull. 991 1985

992 : The antitrust bulletin

market link variable does not. It is statistically significant at the

10 percent level in only three of six equations. Further, it carries
an unexpected positive sign in two of these equations which
implies that when links are high rivalry is high. Thus, in contrast
with the original links study, this study finds no consistent
evidence of a relationship between multimarket links and rivalry
as measured by mobility and turnover.28
Table 3 presents results in which performance rather than a
rivalry measure is used as the dependent variable. For this reason,
variables likely to affect profits and prices are included in the
analysis. Results in table 3 are for two different samples. One
sample includes the same 154 markets that were used to test for a
links-rivalry relationship. The other sample includes 56 addi-
tional markets for which appropriate variables could be calcu-
lated. As noted above, the concentration variable generally
performs as expected; i.e., results are consistent with monopoly
pricing and earning monopoly profits in high-concentration
markets. Thus, in both of the samples, results indicate, as
expected, that when concentration is high, rates of return (NI/
TA) are high while the interest paid on time and savings deposits
(ITS/TS) is low. Results for Sample 1, which includes the 154
markets used to test the effect of structure on rivalry, indicate
that where concentration is high, the interest and fees charged on
loans tend to be high. Concentration has no apparent effect on
service charges on demand deposits (SCDD/DD) in either sample
or on interest and fees on loans (IFL/TL) in Sample 2.
Much like results reported in table 2, results on the link
variable (L) in table 3 show little indication of a systematic effect
on profits and prices. Thus, in the smaller sample, the link
variable is never statistically significant and in the larger sample
there are conflicting results. In particular, contrary to expecta-
tions, the link variable has a statistically significant (10 percent
level) negative effect on rates of return (NI/TA). But it also has
an expected, statistically significant (5 percent level) positive
effect on interest and fees on loans (IFL/TL). In short, the tests
28 There is no evidence of nonlinearity in the relationship.

HeinOnline -- 30 Antitrust Bull. 992 1985

 Banking 993

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HeinOnline -- 30 Antitrust Bull. 993 1985

994 : The antitrust bulletin

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HeinOnline -- 30 Antitrust Bull. 994 1985

 Banking : 995

in approach #2 provide little support for the mutual forbearance

hypothesis.

VI. Summary and conclusion

This study uses two different approaches to test Corwin

Edwards' mutual forbearance hypothesis, which has been applied
to banking as the linked oligopoly hypothesis by Elinor Solomon.
The first approach uses the same sample and time period in
extending an earlier study by Heggestad and Rhoades. The
second approach investigates a more recent time period and
introduces a number of refinements to the analysis. Whereas the
earlier study by Heggestad and Rhoades reported results support-
ing the hypothesis, the first approach used in this article provides
only partial support and the second approach provides practically
no support for the hypothesis. The mixed findings reported here
are consistent with earlier research in the sense that the research
cited earlier has turned up mixed findings on the mutual forbear-
ance hypothesis.
The explanation for these divergent results is not clear. It may
simply reflect the fact that the bank holding company movement,
which began in the late 1960s, continued to grow throughout the
1970s. Since the bank holding company movement has been
propelled by market extension mergers, which continued at a high
rate during the 1970s, perhaps too many changes in multimarket
linkages took place during the sample period to satisfactorily
capture the long-run effect of linkages in our measures. In view
of the fact that Whitehead's study found that multimarket links
had a procompetitive effect in Florida, where bank holding
companies were actively expanding around the state, it is possible
that the longevity of multimarket links will have different effects.
Specifically, in states where multimarket links have only recently
developed, the entry (usually by acquisition) creating the links
may be a stimulus to competition. In the long run, however, after
the intense expansion activity has ended, the interdependence in
firm relationships which develop may weaken competition.
Whether this explanation is valid could be determined by con-
ducting tests for states in different (mature versus new) stages of
multimarket links.

HeinOnline -- 30 Antitrust Bull. 995 1985

HeinOnline -- 30 Antitrust Bull. 996 1985