Oligopoly Market and Australian Banking Sector

Running head: ECONOMICS FOR BUSINESS
Economics for Business
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Introduction
The Australian financial sector is a strong, competitive, and resilient system with the
ability to handle relevant shocks in the system. The overall asset ratio of the banking sector of
the country is much higher compared to those of the banks in the global sector. Four major
retail banks such as the Commonwealth Bank of Australia, Westpac Banking Corporation,
Australia and New Zealand Banking Group and the National Australia Bank extensively
dominate the financial sector of the country (Moradi-Motlagh & Babacan, 2015). All these
banks run under the supervision of the Reserve Bank of Australia (RBA). There are several
other, comparatively smaller, banks that are dominated by the market share of the big four
banks of the economy. These financial firms are affecting the efficiency of the market
structure and are creating a monopoly of their own (Rafay & Gilani, 2016). This is leading to
a loss in consumer welfare, as the consumers are charged higher for all services provided by
these organizations.
This report will compare the similarities between the oligopoly market and the
banking sector of Australia. This paper will highlight the dictatorship of the four major banks
on the financial market of Australia. This will include the relative inefficiencies possessed by
the existing firms on the smaller banks and will try to incorporate the relative measures
adopted by the government of Australia to overcome the market failure.
Comparing the banking sector with an oligopolistic market structure
An oligopolistic market is featured with the assumptions of few numbers of sellers
dominating the entire market system. Large numbers of buyers are price takers from the
competitive price set by the oligopolistic firms. Existence of advertising cost and threat from
other dominant rivals makes the firms extensively competitive. The dominating firms possess
restrictions to entry of emerging firms and lay their paths of success with difficulties.

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However, these firms are given support from the administration and the buyers are offered
with a variety of products to choose from (Cubbin, 2013).
The Australian market for capital and finances are claimed to share similar
characteristics with the oligopolistic market. This banking sector is a competitive platform
with high levels of profit, scope and threats from foreign as well as existing domestic firms.
As per the, Australian Competition and Consumer Commission (ACCC) chairperson, the
banking sector of the country is a “cozy market oligopoly” (Smyth, 2019). The big four retail
banks of Australia extensively dominants the financial system. They are constantly
strategizing to maximize profit. Moreover, in the year 2003-04 the mega four bank claimed to
generate about 400 million dollars in terms of assets and mutual funds (Tapper, 2018).
Although there are several others relatively smaller firms that do not have much influence
over the market system. All the existing firms offer more or less similar services to its
customers. Their area of expertise is providing loans, saving rates and investment strategies.
The customers are provided with variety of deposit schemes. Investors or the loan issuers are
provided flexible interest rates. Intense competition among the mega four organizations
makes them efficient and induces them to innovate fresh schemes to attract quality customers.
The price competition intensifies, whenever there is a change in price strategy by the other
firms. Even a slight change in marketing disciplines by a firm affects the other existing firms
in the market system. The forces of demand and supply determine the price for services and
interest rates of the banks. The interest rates are also influenced by the exogenous shocks into
the model. Though there are other firms in the market, yet there are relative restrictions in the
market for new entries. The hierarchy of the dominant banks restricts the free operations of
the new infant financial sector in the market. Advertising are a compulsory factor adopted by
firms to attract their loyal as well as new customers into their domain. Thus, the market for
capital and assets truly resembles an oligopolistic market scenario (Tyers, 2015).

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The major leading banks of the Australian financial system is claimed to acquire more
than 75 per cent of the domestic share (Bouzgarrou, Jouida & Louhichi, 2018). They enjoy
low cost for funding than their smaller counterparts. This is due to the lower government
guarantee given to the infant banks for any failure. The big four are capable and strong
enough to withstand shocks of higher magnitudes. They have high levels of profit and they
capture a majority portion of the market share. Figure-1 depicts the market capitalization
ratios of the banks present in the market system. The data represents market share till the end
of the financial year of 2017. The figure clearly portrays the big four Australian Banks
dominating the entire financial market. Westpac with the highest share followed by rest of the
banks. They have high ratio of financial asset compared to their international competitors.
Figure 1: Market share of the Australian Banks
(Source: Smyth, 2019)
Figure-2 illustrates the strong finances and assets of the four major banks in
Australia. The data taken is of December 2018. This clearly depicts the current profit levels
of the firms, which is exceeding the required level as prescribed by the Reserve Bank of