Multimarket Interdependence and Performance in Banking: Two Tests

• Author: Stephen A. Rhoades,Arnold A. Heggestad
• DOI: 10.1177/0003603X8503000407
• Published date: 01 December 1985
• Date: 01 December 1985
• Subject Matter: Article

The Antitrust Bulletin/Winter 1985

Multimarket interdependence and

performance in banking: two tests

975

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.' 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.

IMany

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).

2Corwin Edwards, "Conglomerate Bigness as a Source of Power,"

Business Concentration and Price Policy, ed. G. Stigler (Princeton:

Princeton University Press, 1955), pp. 331-59.

e1986by Federal Legal Publications, Inc.

976 The antitrust bulletin

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.'

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-

ture. Studies to date yield mixed results.'

3Stephen 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).

4Results 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 Corporate Mergers (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.