Title: Creating contestable banking market: the effect of changes in the regulatory structure in Indonesia

Authors: Tri Mulyaningsih; Anne Daly; Riyana Miranti

Addresses: Faculty of Economics and Business, UNS, Sebelas Maret Surakarta University, Jl. Ir Sutami 36A, Surakarta 57126, Indonesia ' Faculty of Business, Government and Law, University of Canberra, ACT 2610, Australia ' National Centre for Social and Economic Modelling, University of Canberra, ACT 2610, Australia

Abstract: Banks have market power due to the existence of product differentiation, high switching costs, locational characteristics, banks specialised knowledge and segmented customers. Therefore, creating a contestable market is more realistic than establishing perfect competition. This study aims to examine the role of opening the market to create contestability. In the last 30 years, the industry experienced structural changes from a closed-regulated into open-less regulated industry. The Panzar-Rosse method is employed to estimate the degree of competition, find the market structure and assess the impact of opening the market to competition. This study found that in a free entry market, banks are more competitive. The potential entrants act as market discipline so it facilitates the creation of a contestable market as observed in 1989. On the other hand, the absence of potential entrants explains the lack of market discipline for the incumbents to operate efficiently in the 2000s.

Keywords: contestable markets; Panzar-Rosse method; potential entrants; emerging economies; Indonesia; banking industry; regulation changes; regulatory structure; contestability; competition; bank competitiveness.

DOI: 10.1504/IJMEF.2016.076480

International Journal of Monetary Economics and Finance, 2016 Vol.9 No.2, pp.149 - 163

Published online: 10 May 2016 *

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