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Using a translog cost function, we first estimate the economies of scale and then calculate the bank-specific scale elasticities for Korean banks over the period 2007Q2 to 2011Q2. We find that all the National banks operate with significant economies of scale, with bank-specific scale elasticities ranging from 82% to 88%, while half of the Regional banks and Specialized banks also exhibited significant scale economies, with bank-specific scale elasticities averaging around 92% and 83%, respectively. Incorporating these bank-specific scale elasticities directly within the model at the second stage of the Panzar and Rosse (1987) approach to measure market concentration, we find evidence of perfect competition prevailing in Korean banking. This offers a basis for merger policy where there are scale economies to be obtained-reducing average costs-yet having little destabilizing effect on the competitive nature of the industry.
