Australian Banking Industry Analysis

This assignment analyzes the structure and functioning of the Australian banking industry. It examines the concentration of market power among the four major banks and its implications for consumers, including issues like higher costs and reduced choice. The analysis also explores potential regulatory solutions to mitigate these problems and promote a more competitive and equitable banking sector.

Running head: AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
Australian Banking Sector: An Oligopolistic Market
Name of the Student
Name of the University
Author Note

1AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
Table of Contents
Introduction:....................................................................................................................................2
Story’s Essence:...............................................................................................................................2
Economic Analysis of the Situation:...............................................................................................4
Recommendations:..........................................................................................................................7
Conclusion:......................................................................................................................................7
References........................................................................................................................................9

2AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
Introduction:
In economics, the term “market” signifies a place of interaction for the two types of
economic agents, the buyers and the sellers. In other words, a market is the place where the
demand and the supply forces, in terms of their inter-dynamics, determine the price and quantity
aspects of a particular commodity or service. Type of market prevailing for a product, depends
on factors like number of buyers and sellers, the entry exit conditions for economic agents,
market power dynamics and others1. Based on these influencing factors, markets can be
competitive (perfectly competitive being the hypothetical extreme) of imperfectly competitive,
like monopoly, monopolistic competition and oligopoly (monopoly being the opposite of perfect
competition). The assignment tries to analyze the type of market structure prevailing in the
Australian banking industry. For research purposes it takes the article named, “Flush and
Dominant, Australia’s Banks Come Under Pressure”, written by A. Odysseus Patrick, as
reference2.
Story’s Essence:
The article finds that the Australian banking market, four major players in the supply side
categorically rule though having many players, both in the supply side and the demand side. In
1 Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue. Economics: Principles, problems, and policies.
McGraw-Hill, 2013.
2 A. Nytimes.com, 'Flush And Dominant, Australia’S Banks Come Under Pressure' (Nytimes.com, 2017)
<https://www.nytimes.com/2016/10/15/business/dealbook/australia-banks-under-pressure.html?mcubz=1> accessed
29 August 2017.

3AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
fact, these four politically supported and immensely influential banks majorly shadow all other
banks. These four players are the Westpac Bank, the Commonwealth Bank, the Australia and
New Zealand Banking Group and the Australia’s National Bank. Among them, two banks, the
Westpac Corporation and the Commonwealth Bank, especially its CommInsure wing, are worthy
of special mention when it comes to the consolidation of market power in the hands of the
players in the Australian banking industry3.
The high concentration of the market power in the hands of these four big banks in the
Australian banking market, indicates the presence of a clear oligopolistic structure in the
concerned market. These players have been enjoying tremendous control over the banking sector
and its pricing and other decisions for a long time and this, according to the article, has given rise
to many unfavorable and unfair issues, specially affecting those on the demand side4.
The four banks tend to work apparently in a cartel construct in the recent times and do
pose as a credible threat to the distribution of market power as they have the potential to join
hands together and work as a collusive monopolistic unit in the market. The article puts forward
the negative side of this oligopolistic construct in the banking industry of the country. Due to the
presence of immense market power and substantial political support, most of these big players
have been found to misuse their power to fulfill their vested interest of personal profit
maximization even if that comes at the costs of sufferings of their clientele5. The article puts
3 Maine, Bob. "The relentless pursuit of bank profits." Green Left Weekly 1120 (2016): 2.
4 Allen, David E., and Robert Powell. "The fluctuating default risk of Australian banks." Australian Journal of
Management 37.2 (2012): 297-325.
5 Maine, Bob. "The relentless pursuit of bank profits." Green Left Weekly 1120 (2016): 2.

4AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
forward as an example of this misusing of power, the instances of CommInsure, where the unit
avoided claims of insurances by deleting medical evidences, unfairly influencing the doctors and
other fraudulent activities. Other banks like the Westpac, has also evidences of manipulating
their interest rates and claims design according to situations, to benefit monetarily, putting their
customers in financial crisis. The banks have also behaved strikingly rudely and unfairly with
terminally ill people to get away without paying their medical claims as were previously
promised by the banks6. All these have given rise to tremendous dissatisfaction among the
demand side agents and has become a primary concern of the government of the country as
customers are losing confidence over the banking sector of Australia. The government has
undertaken several strict vigilance reforms, regulations and punishing steps, while many more
reforms are required to bring back the welfare quotient and confidence of the customers on this
concerned industry7.
Economic Analysis of the Situation:
The oligopoly market can be distinguished with the help of its inherent characteristic of
many buyers and a few sellers, the sellers experiencing strategic interdependence on each other.
This implies the strategies and outcomes of one seller in this market highly depend on the
6 Tyers, Rod. "Service Oligopolies and Australia's Economy‐Wide Performance." Australian Economic Review 48.4
(2015): 333-356.
7 Kavurmacioglu, Emir. Oligopolies in private spectrum commons: analysis and regulatory implications. Diss.
Boston University, 2016.

5AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
decisions of his fellow sellers. The market can have two outcomes: depending upon the situation
there can be a price war or there can be formation of a collusive agreement among the
participating sellers8.
Figure 1 : Oligopoly Market
(Source: As created by Author)
Due to the presence of the kinked demand curve in the oligopolistic, which is in turn a
result of non-identical and varying price elasticity, there arises a gap between the cost levels of
production and the price charged by the firm for their products. The firms, being only a few,
enjoy this advantageous position over the buyers, who, being many in number, creates
8 Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue. Economics: Principles, problems, and policies.
McGraw-Hill, 2013.

6AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
substantial demand for the product, thereby helping the firm to charge a higher price for their
product than that would have been charged in the competitive situation.
The outcome becomes even more favorable for the sellers if they come to a cartel
agreement, thereby ruling out price wars among them. Together they enjoy higher profits and
higher market power provided they do not cheat, which is inherent characteristic of an
oligopolistic cartel. The current situation of the Australian banking market can be indentified
with this construct9.
However, if the firms join hands to become a monopolistic working together, their cost
and price gap can increase even more as is shown in the diagram below:
Figure 2: Long run in the Monopoly Market
(Source: As created by the author)
9 Marshall, Robert C., and Leslie M. Marx. The economics of collusion: Cartels and bidding rings. Mit Press, 2012.

7AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
In the monopoly market, due to the presence of the aggravated cost-price gap, in the long
run also the firm enjoys economic profit. This can be a potential threat for the buyers in the
banking market of Australia if the four big player join hands for a monopolistic construct.
Recommendations:
To rule out the problems faced by the consumers in the Australian banking industry and
to prevent any other future threats of consolidation and misuse of market power to substantial
extent by any of the participating agents, a stricter and regulatory environment has to be set up
by the governing authorities of the country. This should incorporate unbiased vigilance and
actions in case of defaulting by any of the players. New players should also be encouraged and
provided with sufficient securities in face of the competition they will face from the big ones10.
Conclusion:
In presence of market imperfections and asymmetric information structure, the party with
lack of information is bound to suffer. This makes free market condition more desirable.
However, in absence of free markets, proper reform, regulations, restrictions and unbiased
governance of a market can help in proper distribution of market power and welfare of the
participating agents, thereby making the market more equitable. The Australian banking industry
10 Feng, Yuan, Baochun Li, and Bo Li. "Price competition in an oligopoly market with multiple iaas cloud
providers." IEEE Transactions on Computers 63.1 (2014): 59-73.

8AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
can also incorporate the above mentioned reforms to make the situation better for the buyer
group.

9AUSTRALIAN BANKING SECTOR: AN OLIGOPOLISTIC MARKET
References
Allen, David E., and Robert Powell. "The fluctuating default risk of Australian
banks." Australian Journal of Management 37.2 (2012): 297-325.
Feng, Yuan, Baochun Li, and Bo Li. "Price competition in an oligopoly market with multiple
iaas cloud providers." IEEE Transactions on Computers 63.1 (2014): 59-73.
Kavurmacioglu, Emir. Oligopolies in private spectrum commons: analysis and regulatory
implications. Diss. Boston University, 2016.
Maine, Bob. "The relentless pursuit of bank profits." Green Left Weekly 1120 (2016): 2.
Marshall, Robert C., and Leslie M. Marx. The economics of collusion: Cartels and bidding rings.
Mit Press, 2012.
Nytimes.com A, 'Flush And Dominant, Australia’S Banks Come Under Pressure' (Nytimes.com,
2017) <https://www.nytimes.com/2016/10/15/business/dealbook/australia-banks-under-
pressure.html?mcubz=1> accessed 29 August 2017
Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue. Economics: Principles,
problems, and policies. McGraw-Hill, 2013.
Tyers, Rod. "Service Oligopolies and Australia's Economy‐Wide Performance." Australian
Economic Review 48.4 (2015): 333-356.