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Intermediation and Vertical Integration

Mitchell Berlin and Loretta J. Mester
Journal of Money, Credit and Banking
Vol. 30, No. 3, Part 2: Comparative Financial Systems (Aug., 1998), pp. 500-519
DOI: 10.2307/2601253
Stable URL: http://www.jstor.org/stable/2601253
Page Count: 20
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Intermediation and Vertical Integration
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Abstract

Competition in retail and wholesale funding markets affect the incentive for originators (like investment bankers) and fund managers (like mutual funds) to form integrated intermediaries (banks). Independent firms integrate both to produce higher-yielding, illiquid assets and to suppress competition in retail markets. In addition to the higher return on illiquid assets, three factors increase the incentive to integrate. First, homogeneous savers lower the costs of producing illiquid assets and increase competition in retail markets. Second, fund managers' market power in wholesale markets increases competition in retail markets. Finally, more certain aggregate savings reduces the costs of producing illiquid assets.

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