Banking Industry In Australia Essay

Questions:

Discuss about the Market Structures of Banking in Australia.

Answers:

Introduction:

The nature of a market mainly depends on the number of buyers and sellers present in the market, the type of good the market deals with, concentration of market powers and the freedom of entry and exit of new and old participants in the market. These factors cumulatively shape up a market for a particular good or service and together they give a more or less clear picture of conditions of the participating agents of the markets (Okuguchi and Szidarovszky 2012). Markets, in terms of economics, can be broadly divided into perfectly and imperfectly competitive types, with monopoly, oligopoly and monopolistic competitions falling in the latter category. The report discussed the problems that usually occur in an imperfectly competitive market. It specifically takes reference of the article, “Australian watchdog says bank 'oligopoly' needs more reform”, by Tom Westbrook and Byron Kaye, which focuses on the banking industry in Australia (Reuters.com, 2017).

Essence of the Story:

Four specific big players, namely the Australia and New Zealand Group of Banking, National Australia Bank, Commonwealth Bank and lastly the Westpac Banking Corporation, have long dominated the banking market in Australia. These four banking giants, giving the market an inevitable oligopolistic structure, significantly shadow the presence of other small players. According to the concerned article, the presence of oligopoly in the banking market has resulted in a significant concentration of market power in the hands of these four enterprises (Reuters.com, 2017). In fact, collectively these four giants form a cartel like structure, thereby controlling nearly four-fifth of the Australian banking sector, even pose as a credible threat of formation of future monopoly if they join hands, and operate together.

However, these four banking enterprises are been accused of misusing their market power to substantial extent, for their personal profit maximization. The evidences of exploitation of their market powers are found in the series of scams and scandals regarding their operating methods (Shamsuddin and Xiang 2012). They are even accused of rigging of interest rates and scams in insurance policies, thereby becoming a cause of concern and anger among their clientele.


People, as the article suggest, are losing confidence over the industry, thereby making this issue a cause of concern among the regulatory authorities. The presence of political support and lack of transparency are making the situation even worse and the sector needs to be subjected to extensive reforms and regulations in order to gain back peoples’ confidence (Tirole 2014).

Economic Analysis:

An oligopoly market is essentially one with a large number of buyers and a few sellers, thereby giving more market power in the hands of the sellers. One of the primary characteristics of this market is the strategic interdependence of the sellers, which implies that the strategic decisions of one of them are influenced by what strategies its fellow sellers are taking. The oligopoly market structure gives either rise to price war among the sellers or leads to formation of cartel and a collusive pricing strategy among them (Kopecky and Van Hoose 2012).

Figure 1: Oligopolistic Market

(Source: Created by author)

The oligopoly market, as can be seen in the above diagram, has a kinked demand curve, due to presence of different elasticity of demand at different points. The equilibrium price and quantity levels are PE and QE respectively. From the above diagram, the existence of a gap between the cost of production and the price charged by the producers for the product can be clearly perceived (Dubovik and Janssen 2012). This provides support to the concerns raised in the chosen article, about the disparities in the cost and price structures by the above-mentioned banking enterprises and their extensive misusage of market power to maximize their own profits even at the cost of welfare of their clientele (Acharya, Gromb and Yorulmazer 2012).

The threat of a possible formation of collusive monopoly by these four firms are credible to some extent and if that happens the gap between cost and pricing can be even more prominent, as can be shown in the following diagram:

Figure 2: Monopoly Market

(Source: Created by author)

It is evident from Figure 2, that if monopoly occurs in the market, there will be presence of a substantial amount of economic profit, even in the long run, due to the presence of extreme market power and price making capacity in the hand of one particular enterprise or collusive structure, working as a monopoly (Acharya, Gromb and Yorulmazer 2012).

In either ways, in a oligopolistic structure or a monopolistic environment, in absence of proper regulatory mechanisms, pricing disparities and misuse of market power by the sellers can be a common issue of concern, especially for those on the buyers’ side as they are the direct sufferers. The banking sector, as discussed in this report, is also experiencing a similar condition, the buyers being at the receiving end (Shamsuddin and Xiang 2012).

Recommendations:

In order to combat the situation discussed above and to lessen the lack of confidence of the clients of banking industry as a whole, it is essential to implement extensive reforms in this sector. The reforms can be primarily based on regulatory policies and a controlled interest rate mechanism, whereby the government of Australia monitors the interest rates set by these banking enterprises and intervenes if the rates cross a fixed upper and lower threshold. To break the oligopoly and the collusive structure, new entrants can be encouraged and can be given proper protection in order to secure them from being wiped off in face of stiff competition from these large banking enterprises (Corch?n and Marcos 2012).

Conclusion:

Free market, in general, is desirable as this type of markets uniformly distributes market power among buyers and sellers, thereby eliminating the possibilities of inclination of the market in favor of any of the two participating agent groups. However, some markets show presence of imperfect competitions, as can be seen in the banking market of Australia, whose oligopolistic construct has led to misuse of market power by a few suppliers, leading to sufferings and anger among a large share of the clientele. This problem can be solved to a considerable extent by proper reforms in the form of strict and unbiased regulatory measure, monitoring systems and government intervention in the banking sector, as and when needed. Encouragement to small players can also be beneficial to form sufficient competition in the market, thereby reducing the market powers currently enjoyed by a few big players.

References

Acharya, V.V., Gromb, D. and Yorulmazer, T., 2012. Imperfect competition in the interbank market for liquidity as a rationale for central banking. American Economic Journal: Macroeconomics, 4(2), pp.184-217.

Corch?n, L.C. and Marcos, F., 2012. Price regulation in oligopolistic markets. ISRN Economics, 2012.

Dubovik, A. and Janssen, M.C., 2012. Oligopolistic competition in price and quality. Games and Economic Behavior, 75(1), pp.120-138.

Kopecky, K.J. and Van Hoose, D.D., 2012. Imperfect competition in bank retail markets, deposit and loan rate dynamics, and incomplete pass through. Journal of Money, Credit and Banking, 44(6), pp.1185-1205.

Okuguchi, K. and Szidarovszky, F., 2012. The theory of oligopoly with multi-product firms. Springer Science & Business Media.

Reuters.com (2017). Australian watchdog says bank 'oligopoly' needs more reform. [online] U.S. Available at: [Accessed 24 Aug. 2017].

Shamsuddin, A. and Xiang, D., 2012. Does bank efficiency matter? Market value relevance of bank efficiency in Australia. Applied Economics, 44(27), pp.3563-3572.

Tirole, J., 2014. Market power and regulation. Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

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