*6.2. Theil Inequality for Market Power*

The results from the calculation of the total Theil inequality index for the Lerner index of market power and its within-group and between-group components are presented in Table 5, as well as in Figures 5 and 6.

**Figure 5.** Evolution of the within-group and between-group components of the Theil inequality index for the euro area core and periphery country groups. Source: BankScope database, ECB, World Bank, own calculations.

**Figure 6.** Decomposition of the Theil inequality index for the euro area core and periphery country groups into percentage within-group and between-group components. Source: BankScope database, ECB, World Bank, own calculations.



Notes: Total change is the difference between the value for 2017 and the value for 2005. The figures in parentheses denote percentages of within-group and between-group inequality over total inequality. Source: BankScope database, ECB, World Bank, own calculations.

As it is shown in Table 5, as well as in Figures 5 and 6, the disparities in market power are due, almost exclusively, to di fferences inside each group (EA-Co or EA-Pe). The di fferences between the EA-Co and EA-Pe are negligible. This evolution suggests that there is a clear convergence between the EA-Co and EA-Pe country groups with respect to competition, as measured by the Lerner index of market power. In addition, it is also clear that we need higher granularity, which can be obtained by investigating whether di fferences in market power stem from inequalities between di fferent countries (between-country inequality) or from inequalities between banks in a given country (within-country inequality). This desired level of granularity can be obtained by the calculation of a Theil inequality index and its decomposition into within-country and between-country components.

The results from the calculation of the total Theil inequality index and its within-country and between-country components are presented in Table 65, as well as in Figures 7 and 8. Figure 7 shows that in 2008 the level of total inequality in bank market power in EA-19 was close to its 2005 level, after a sharp increase of the between-country inequality in 2006. The increase of the Theil inequality index in 2009 indicates that the financial crisis reversed the progress towards lower disparities across countries, suggested by the lower values of the between-country component in the period 2007–2008. In 2011, total inequality was close to its 2008 level, since an increase in within-country inequality in 2011 was accompanied by a decrease in between-country inequality in that year. Total inequality started increasing in 2012, mainly due to an increase in its within-country component, reaching a peak in 2017. The persistence of significant within-country inequalities in market power has also been shown by Cruz-Garcia et al. (2017), who investigate the impact of financial market integration on the evolution of disparities among European banks' market power using bank-specific data for the EA-12 countries over the period 2000–2014.

**Figure 7.** Evolution of the within-country and between-country components of the Theil inequality index for the Lerner index of market power. Source: BankScope database, own calculations.

The level of total inequality in bank market power in periphery countries was generally higher, presenting also more fluctuations than that of the core countries during almost all years of the period under study, mainly due to the higher between-country inequality among periphery countries.

<sup>5</sup> It should be noted that some expected minor differences (at the third decimal place) in total inequality between Tables 5 and 6 are due to different data grouping (19 countries vs EA-Co/EA-Pe) and weighting.


 *13*, 57

over total inequality. Source: BankScope database, own calculations.

**Figure 8.** Decomposition of the Theil inequality index for the Lerner index of market power into percentage within-country and between-country components. Source: BankScope database, own calculations.

As shown in Figure 8, from 2011 to 2017 the between-country inequality was generally much smaller than the within-country inequality across all the three country groups under examination, indicating a decrease in fragmentation in the euro area with respect to market power.

The values of the Lerner index and the Theil inequality index, presented in Tables 1 and 6, respectively, could be biased due to the unbalanced nature of the underlying panel dataset, so we also considered a fully balanced subset of the unbalanced dataset. After the deletion of countries with less than five banks per year, the balanced subset contains 7605 observations from 585 banks from nine euro area countries (Austria, Belgium, France, Germany, Italy, Latvia, Lithuania, Luxembourg, and Slovakia). The results obtained for this group of nine countries were generally in line with the results obtained for EA-19.
