ABSTRACT – We extend the framework of Bresnahan and Reiss [1991a] to measure the competitive effect of the public ownership of banks in concentrated local banking markets in Brazil. We use variation in market size, the number of competitors and their identities to determine how the conduct of private banks is affected by the entry of a public bank. We find that local markets whose structure includes private bank duopolies are more than 35% larger than private monopolies, whereas duopolies containing one public bank and one private bank and private monopolies do not differ with respect to market size. These results suggest that the presence of a rival private bank toughens competition, but the presence of a public bank does not affect the conduct of private banks.

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