Oligopoly Market Structure in Australian Banking Sector

This report analyses the type of market structure prevailing in the banking sector of Australia, highlighting the issues evolving in this sector and recommending possible solutions in the light of economic theories and concepts. The report takes reference of the article, Australian watchdog says bank 'oligopoly' needs more reform (Reuters.com 2018). The banking sector of Australia has been operating in a clearly oligopolistic structure in the recent years, which in turn has led to immense distortion in the distribution of market power and mis-utilization of the same by the big four supply side players, thereby compromising the welfare of the clientele in the country as well as in other countries.

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

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Table of Contents
Introduction................................................................................................................................2
Article Summary........................................................................................................................2
Economic conceptual interpretation and analysis......................................................................3
Oligopoly Market...................................................................................................................4
Relevance with banking sector...............................................................................................5
Conclusion..................................................................................................................................6
References..................................................................................................................................8

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Introduction
Economics as a discipline, has developed considerably with time, with the theoretical
and conceptual framework of the same undergoing changes and modifications with the
changes in the trends of economic activities across the global framework with time (Fujita
and Thisse 2013). The different components of the conceptual framework and their
theoretical assertions are found to be having significant relevance with the real economic
scenarios across the world.
In this context, one of the primary components of economics is the concept of market.
“Market” in economics, is defined as the place where the buyers and the sellers of different
commodities mutually negotiate and agree on the price and quantity of the same. In economic
framework, markets can be of different types depending on the numbers of buyers and sellers,
the nature of products bought and sold, the level of competition, distribution of market power
as well as barriers to enter the market. Several important market structures are that of perfect
competition, monopoly, oligopoly, monopolistic competition and others (Kagel and Roth
2016).
Keeping this into account, the report tries to analyse the type of market structure
prevailing in the banking sector of Australia, in the contemporary period and also tries to
analyse and interpret the issues evolving in this sector, thereby recommending the possible
way outs in the light of the economic theories and concepts. To study the market structure
and the dynamics in the same in the banking sector of the country, the report takes reference
of the article, Australian watchdog says bank 'oligopoly' needs more reform (Reuters.com
2018).

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Article Summary
The article taken into consideration for the concerned report, strongly asserts towards
the presence of a distinct oligopolistic structure in the banking sector of Australia, which has
been riddled with a series of scandals, which in turn has led to loss of confidence from the
financial sector of the country. The article also highlights the views of the Australian
Securities and Investments Commission (ASIC), which emphasizes towards the need for
reforms in the banking oligopolies in the country to boost up and gain back lost confidence.
The big four banks, being the Commonwealth Bank, the Australia and New Zealand
Banking Group, the National Australia Bank and the Westpac Corp, together enjoy nearly
four fifth of the banking market share in the country and have over the years experienced
huge profits and market power (Reuters.com 2018). However, the article points towards the
instances of several string of scandals in terms of rigging, insurance scams and self-benefiting
financial advice, which in turn points towards the abuse of market powers on part of these
banks, thereby showing trends of exploitation of the clients and high unaccountability. The
article also points towards the presence of lobby like structure among these banks and the
presence of unfair political support (Reuters.com 2018).
This in turn, as suggested by the article, has led to imposition of higher regulations
and monitoring on these banks, on part of the governing authorities, with an intension to
create transparency in their operational framework as well as to see how these banks respond
to the public anger in the coming years. The concerned article also highlights the need for
increase in the level of fair competition to increase the overall welfare of the economy.
Economic conceptual interpretation and analysis
As has been discussed above, the banking sector of Australia, in spite of the presence
of many small and medium supply side players, are primarily dominated by the above

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mentioned four big banks, as can be seen from their cumulative market shares in different
sectors of the banking industry shown as follows:
Figure 1: Combined market shares of the big banks of the country
(Source: Asianbankingandfinance.net 2018)
This in turn points towards the presence of oligopolistic market structure in the
banking sector of Australia.
Oligopoly Market
In terms of economics, an oligopoly market is characterized by the presence of only a
few sellers and a large number of buyers, which in turn leads to unequal distribution of power
among the buyers and the sellers. In this type of market, each of the sellers enjoy
considerable market power and decision-making abilities regarding the price and quantity
supplied of their products (Sushko 2013). The sellers also enjoy high profitability and pose as
credible threats for any new entrant in the market. However, the actions and productive

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outcomes of each of the seller in an oligopolistic market is found to be dependent on the
actions of their competitors.
Thus, there may be two types of dynamics in the oligopoly market. The sellers can
either indulge in a price war with each other or can operate in a cartel like cohesive
oligopolistic situation. A price war, however, leads to the loss of economic welfare of the
sellers to some extent as their profitability is threatened. This is because, a price cut by one is
followed by a price cut by others but not vice versa, thereby leading to the creation of kinked
demand curve:
Figure 2: Kinked demand curve in oligopoly
(Source: As created by the author)
On the other hand, entering into a collusive oligopoly leads to an overall increase in
the combined profitability and market power of the cartel, thereby benefiting all the sellers
individually, provided none of them cheats (Waldman and Jensen 2016).

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Relevance with banking sector
The banking sector of Australia, is thus, found to be operating in a collusive
oligopoly, with a lobby like structure, which has immensely facilitated in the capture of huge
market share by these big four banks together. This has in turn enabled them to misuse their
market power and influence, which can be seen from the banking scandals which led to their
profitability by compromising the security and economic welfare of the clients (Carson
2013). The increase in dissatisfaction of the clients and the loss of their confidence can be
stopped by increasing the scopes of competition in the industry, which can only be done by
the governing authorities in the form of support and protection to the small and medium
banks and strict monitoring on the large ones.
Figure 3: Normal Profit in perfect competition
(Source: As created by the author)
This justifies the step announced to be taken by the governing authorities of the
country, in the aspect of developing stricter monitoring and higher transparency in the
operational framework of the big four banks (Goodwin et al. 2015).

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Conclusion
From the above discussion it can be asserted that the banking sector of Australia has
been operating in a clearly oligopolistic structure in the recent years, which in turn has led to
immense distortion in the distribution of market power and mis-utilization of the same by the
big four supply side players, thereby compromising the welfare of the clientele in the country
as well as in other countries. This has led to immense dissatisfaction among the clientele and
loss of confidence from the financial sector of the country, to restore which, proper vigilance,
transparency on part of the big banks and support to the small and medium ones are required
to encourage competition and efficiency in the banking sector of the country.

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References
Asianbankingandfinance.net (2018). Combined market share of Australia's big four banks.
[online] Asian Banking & Finance. Available at: http://asianbankingandfinance.net/retail-
banking/exclusive/combined-market-share-australias-big-four-banks [Accessed 19 Apr.
2018].
Carson, A., 2013. The History of Investigative Journalism in Australia. S. Tanner.
Fujita, M. and Thisse, J.F., 2013. Economics of agglomeration: cities, industrial location,
and globalization. Cambridge university press.
Goodwin, N., Harris, J.M., Nelson, J.A., Roach, B. and Torras, M., 2015. Microeconomics in
context. Routledge.
Kagel, J.H. and Roth, A.E. eds., 2016. The Handbook of Experimental Economics, Volume 2:
The Handbook of Experimental Economics. Princeton university press.
Reuters.com (2018). Australian watchdog says bank 'oligopoly' needs more reform. [online]
Reuters.com. Available at: https://www.reuters.com/article/us-australia-banks/australian-
watchdog-says-bank-oligopoly-needs-more-reform-idUSKCN12E0F3 [Accessed 19 Apr.
2018].
Reuters.com (2018). Money laundering probe exposes Australian banks' compliance frailties.
[online] Reuters.com. Available at: https://www.reuters.com/article/us-australia-cba-

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compliance-analysis/money-laundering-probe-exposes-australian-banks-compliance-frailties-
idUSKCN1B00V8 [Accessed 19 Apr. 2018].
Sushko, I. ed., 2013. Oligopoly dynamics: Models and tools. Springer Science & Business
Media.
Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.