Australian Banking Market Oligopoly

This assignment examines the issue of an oligopoly in the Australian banking sector. It explores how this concentration of market power among a few major banks affects customers and leads to concerns regarding interest rates, competition, and regulatory oversight. The report suggests solutions like government intervention, encouraging new entrants, and implementing stricter regulations to mitigate these issues and foster a more balanced and competitive banking market.

Running head: MARKET STRUCTURES IN BANKING: AUSTRALIA
Market Structures in Banking: Australia
Name of the Student
Name of the University
Author Note

1MARKET STRUCTURES IN BANKING: AUSTRALIA
Table of Contents
Introduction:....................................................................................................................................2
Essence of the Story:.......................................................................................................................2
Economic Analysis:.........................................................................................................................3
Recommendations:..........................................................................................................................6
Conclusion:......................................................................................................................................6
References........................................................................................................................................8

2MARKET STRUCTURES IN BANKING: AUSTRALIA
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

3MARKET STRUCTURES IN BANKING: AUSTRALIA
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).

4MARKET STRUCTURES IN BANKING: AUSTRALIA
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).

5MARKET STRUCTURES IN BANKING: AUSTRALIA
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

6MARKET STRUCTURES IN BANKING: AUSTRALIA
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 (Corchón 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

7MARKET STRUCTURES IN BANKING: AUSTRALIA
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.

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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.
Corchón, 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: http://www.reuters.com/article/us-australia-banks-idUSKCN12E0F3 [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.