Economics: Australian Banks and Oligopoly Market

Running head: ECONOMICS
Economics
Name of the Student
Name of the University
Author Note

1ECONOMICS
Table of Contents
Part A.........................................................................................................................................2
Answer 1................................................................................................................................2
Answer 2................................................................................................................................2
Answer 3................................................................................................................................3
Answer 4................................................................................................................................4
Part B..........................................................................................................................................5
Answer 1................................................................................................................................5
Answer 2................................................................................................................................6
Answer 3................................................................................................................................7
Answer 4................................................................................................................................7
Answer 5................................................................................................................................8
Reference..................................................................................................................................10

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Part A
Answer 1
Australian Banks operate in more of an oligopoly. The market is identified as an
oligopoly market due to the fact that four largest banks namely Commonwealth Bank,
Westpac, ANZ and NAB dominate the market with considerably large share (Hutchens
2019). This makes banking industry highly concentrated.
Unlike banks in many other countries, banks in Australia comparatively did well and
as per the available evidences, it can be said that Australian banking sector survived the
Global Financial Crisis (GFC). This converse scenario happened due to the policies taken by
the Australian government, Reserve Bank of Australia (RBA) and Australian Prudential
Regulation Authority (APRA). The ‘four pillar’ policy take by the government prevents
mergers among the four dominating banks of Australia. Such a policy restricts competition
within the banking industry. This reduced the risk taking incentive and made the banks less
vulnerable to adverse market situations. The guarantee on small banks’ deposits prevented
them from going bankrupt. Hence, limiting competition and balanced policies helped
Australian banks to sustain under face of the financial crisis.
Answer 2
Assuming four banks in Australia colluded to charge extra price for their products.
The big four banks has the largest banking market share. Thus, collusion makes them the
price maker in the industry and all the small banks would react as per the price set by the big
banks. Therefore, the big four banks will earn a larger profit. In the long run all the small
banks will have to shut down and the big four banks will get monopoly power over the
banking industry (Pindyck and Rubinfeld 2014). The price, profit and out of the market is
given in the below diagram. In the short run, after collusion the price of the banking products

3ECONOMICS
will rise. The banks then can charge a higher price at PM. However, in the long run after all
the small banks exit the price of products will increase and reach point as shown in the
diagram and sell less products, that is at QM. Collusion allows the bank to behave like a
monopolist and earns a supernormal profit indicated by the rectangle APMEB.
Figure 1: Effect of collusion among banks
Source: (Created by the Author)
Answer 3
The government wants to increase competition in the banking sector to restrict the big
four banks in the industry from gaining monopoly power over the market by colluding. In
figure 1, the effect of the monopoly power of the big four banks can be observed. If there is
no competition in the market, then the customers will be exploited by charging higher price
for same products. The volume of the market decreases from the free market point QC to
monopoly point QM. Hence, the government intervenes, regulates the banking sector to avoid
such market conditions and increases competition.