Diversity in Financial Services, Mixed Oligopoly and Social Welfare

Time: 9 January 2019, 13:00-15:00
Venue: S314, SOAS University of London (Paul Webley Wing)
Speaker: Christine Oughton, Professor of Management Economics, SOAS University of London
Chair: Victor Murinde, AXA Professor of Global Finance, SOAS University of London


Models of mixed oligopoly have traditionally focused on industries that contain a mixture of state-owned and privately-owned firms.  We extend this literature by considering mixed oligopolies that include firms that are mutually owned by their customers – mutuals.  Our theoretical model shows that the introduction of mutually owned firms has the effect of reducing the (excess) margin of price over cost and increasing consumer and social welfare.  Moreover, because mutuals face real budget constraints, unlike publically owned firms they do not run the risk of absorbing public subsidies.  Indeed, in the case of the UK financial services industry after the credit crunch and financial crisis, public subsidies were given to several privately owned banks facing bankruptcy, while the mutual sector resolved its financial difficulties without resort to public funding. 

 Our model is applied to the case of financial services in the UK, which contains a mixture of private, public and mutually owned financial institutions. Using a specially constructed index of ownership diversity – the Michie-Oughton D-Index - the model is estimated and used to test the effectiveness of different types of competition – crucially, diversity of type of ownership.  Our results show that competition in the form of greater ownership diversity is more effective than competition from more of the same type of financial institution. The paper has important implications for regulatory policies designed to enhance competition and consumer welfare and the relative effectiveness of granting more bank licenses, as compared to granting more licenses for mutual financial institutions, and transferring the Royal Bank of Scotland to mutual, rather than private ownership.

Co-author: Jonathan Michie, University of Oxford