The Relationship of Market Structure and Efficiency to Profitability of Iranian Banking Industry

The degree of concentration, as a measure of market structure, can explain the competition condition and market power of firms. It affects their performance and profitability. Also, the efficiency of firms affects their performance through an internal mechanism. The purpose of this paper is to examine the relationship between the degree of concentration and profitability in Iranian banking industry on the basis of the structure-conduct-performance hypothesis, as well as the relationship between efficiency and profitability using the efficiency hypothesis. In other words, this research aims to investigate which factor, market structure or efficiency, is more effective on profitability. Using the panel data from 18 banks for a period of nine years (2001-2009), the two hypotheses are examined. The results fully confirm the structure-conduct-performance hypothesis but show some weak evidence in line with the efficiency hypothesis. Limiting the time period to five recent years of the research period (2005-2009), the research shows that the strong relationship between profitability and concentration has reduced during these years and instead, there is more evidence to confirm the efficiency hypothesis.