Alessandra Ferrari University of Reading

1. Discussion of:A model of bank price and nonprice competition with endogenous expected loan losses Alessandra Ferrari University of Reading

2. Main strengths • Very interesting paper, unique dataset; • Product differentiation, C.V. analysis (NEIO) with endogenous risk; • Neat modelling of risk: it affects L and it is endogenous: banks choose rL, rD, γ, B; • Exclusion of risk causes bias in inference on competitive dynamics; • C.V. are function of MS and CR (Hannan, S.C.P.); • Interesting, largely consistent results.

3. Possible improvements V. ambitious, risks to miss the focus and aim. 2 main problems 1. Lost advantage of paper in analysis of competition; 2. Possible specification bias;

4. 1. No analysis of competition Main advantage is the effect of risk on the dynamics of competition: not analysed. Instead analysis of C.V. jumps into SCP, but incompletely: different roles of CR and MS, functional form, interaction, structure vs efficiency etc. Why? How are results consistent?

5. 2. Specification bias Possible bias due to omission of time effects or a macro effect (exogenous demand shifter) (GDP, reliance on banking, Euro…?). Explains: Rivals’ branches elasticity εdBR > 0 call it β1 you get β1 + β2β12 with β2 and β12 > 0 Similarly for εLγ < 0 and εLγR <0 and very large: large negative bias due to effect on denominator of γ.

6. Minor points • Intercepts in equations; • Branch competition at the local level rather than country level? • Coefficients on the C.V. determinants (α, β) have the same interpretation for loans and deposits: they model expected reactions (collusive or not), not how that r enters the profit equation.