Market structure, conduct and performance: Evidence from the Bangladesh banking industry Abdus Samad * Department of Finance and Economics, Utah Valley State College, 800 W. University PKY, Orem, UT 84508, United States Received 26 August 2007; received in revised form 14 December 2007; accepted 14 December 2007 Abstract With regard to the market structure and performance in Bangladesh banking industry, there are two competing hypotheses—the traditional structure–conduct–performance (SCP) hypothesis and the efficiency hypothesis (EH). Using pooled and annual data for the period 1999–2002, this study tests the validity of these two hypotheses. In general, the results of this study support the EH hypothesis as an explanation for market performances in Bangladesh, but for definitive policy purposes, the impact of the banking structure needs to be explored further. Published by Elsevier Inc. JEL classification: G21 Keywords: Bank performance; Market structure; Bangladesh banking 1. Introduction In bank performance literature, two competing hypotheses have been the subject of controversy for more than 40 years. The oldest hypothesis is the traditional structure–conduct–performance (SCP), also known as structure- performance (SP), hypothesis. According to SP hypothesis (Gilbert, 1984; Hannan, 1991), the profitability of a banking firm is dependent upon the market structure and the level of competition. The lower the level of competition in the market, the higher the economic rent for a firm. The basic message of the SP hypothesis is that a higher concentration ratio leads to a higher profitability. The hypothesis that concentration leads to higher profitability has been challenged by an alternative hypothesis, known as the efficiency hypothesis (EH). The EH emphasizes superior efficiency as an explanation for a firm’s profitability. According to EH, ‘‘there is no relationship between concentration and profitability, but rather market share and bank profitability’’ (Smirlock, 1985, p. 69). In other words, the performance of an individual firm depends on the firm’s degree of efficiency. In this hypothesis, the explanation for the relationship between the market structure and performance of a firm is dependent upon the firm’s efficiency. If a firm enjoys a higher degree of efficiency than its competitors (that is, if the firm has a relatively low cost of production structure), the firm can maximize profits and increase its size and market share. This can be done by keeping the Available online at www.sciencedirect.com Journal of Asian Economics 19 (2008) 181–193 * Tel.: +1 801 863 8368. E-mail address: samadab@uvsc.edu. 1049-0078/$ – see front matter. Published by Elsevier Inc. doi:10.1016/j.asieco.2007.12.007