Market Structure and Dynamics: Economics of Australian Banking

This report provides an economic analysis of the Australian banking sector, focusing on its oligopolistic market structure dominated by four major banks. It examines the dynamics of these banks operating in a cartel-like situation, which leads to increased profits but also raises concerns about consu...Read More

Running head: ECONOMICS FOR BUSINESS
Economics for Business
Name of the Student
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Table of Contents
Introduction................................................................................................................................2
Article Summary........................................................................................................................2
Economic Interpretation.............................................................................................................3
Conclusion..................................................................................................................................6
References..................................................................................................................................7

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Introduction
The term “Market”, in the conceptual framework of economics refers to a forum for
the interaction of the buyers and sellers in an industry, where the demand and the supply side
forces interact with each other to reach a mutually agreed situation of price and quantity of a
commodity (Baumol & Blinder, 2015). There exist different forms of markets, in the
economic theoretical framework, varying in terms of the number of demand and supply side
participants, the distribution of market power, the hurdles in the entry and exist from the
market, the nature of the goods or services dealt with in the concerned market. The primary
types of markets are monopoly, oligopoly, perfect competition, monopolistic competition and
others (Pindyck & Rubinfeld, 2014).
Keeping these types of markets and their variations and differences into consideration,
the concerned report tries to analyse the type of market structure which prevails in the
banking sector of one of the dominant economies in the global scenario, Australia. For
studying the same, the report refers to the article, “Flush and Dominant, Australia’s Banks
Come Under Pressure”, which gives an insight about the dynamics in the banking sectors of
the contemporary Australian economy (Nytimes.com, 2018).
Article Summary
As per the assertions of the concerned article taken as a reference in the report, the
banking sector of the country is one of the most dynamic and significant sector of the
economy with many participants both in the demand as well as in the supply side. However,
the supply side of this industry is primarily dominated by four big banks, namely the
Commonwealth Bank, the Westpac Bank. The National Bank and the Australia and New
Zealand banking Group, of which the first two hold more market power, thereby giving a

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clear oligopolistic structure to the sector as there are many buyers and a few suppliers in the
concerned industry.
There also exist a cartel like situation among these four banking giants and the
presence of oligopolistic situation has given these four banks huge market power (BBC.com,
2018). With the help of this power and backing of various interest groups and political
supports, these banking organizations have been found to misuse their power for the purpose
of fulfilling their own profit maximizing goals at the cost of the welfare of their demand side
players as has been argued by the article.
One such incident has been highlighted by the concerned article, of that of the
CommInsure (a part of the Commonwealth Bank), where the same has been accused of
avoiding the insurance claims of their clients. They have been accused of doing so by bribing
the doctors, erasing medical details of their clients and in other unfair forms. Westpac has
also been accused of unfairly changing rate of interests and of avoiding the pre-promised
payment of medical claims of the terminally ill clients.
These unfair utilizations of power have led to the creation of immense dissatisfaction
among the consumers, thereby compelling the government of the country to intervene and
take reforming and regulatory measures to avoid loss of trust of the customers, both domestic
as well as international.
Economic Interpretation
As discussed above, the oligopolistic market is usually comprised of many buyers and
a few (not more than 20) sellers, which in turn enables the each of the sellers to enjoy
substantial share of market power as well as number of clients. However, these sellers are
usually dependent on the actions and decisions of the other sellers when it comes to decision
making regarding pricing and output decisions (Frank & Cartwright, 2013). Thus, in an

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oligopolistic market, the sellers either indulge in a price war or can go for a cartel. The
presence of price war leads to the creation of kinked demand curve in the market which can
be shown as follows:
Figure 1: Kinked demand curve in Oligopolistic Market
(Source: As created by the author)
The presence of price war in the oligopolistic market leads to the creation of
considerable competition in the market. The supply side players respond to the competition
by reducing prices of their commodities which in turn leads to a comparatively inferior
situation for each of the supply side players in the oligopolistic market (Hall & Lieberman,
2012). On the other hand, the entering into a collusive agreement can be beneficial for each
of the player as the same can lead to a higher collective as well as individual profit and higher
efficiency in the market, provided none of the players indulge in cheating activities
(Fudenberg & Tirole, 2013).
The economic situation discussed above is found to be relevant to the scenario
prevailing in the banking sector of Australia, where the four big banking giants are operating

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in a cartel like situation in the oligopolistic market situation. Given this scenario, there
remains a credible threat of these four banks operating together by joining hands, in which
scenario, a monopolistic situation may arise in the sector, which can be shown as follows:
Figure 2: Possible Monopolistic situation in the Australian banking sector
(Source: As created by the author)
As can be seen from the above figure, the price and cost gap are even more than the
oligopolistic market, which can be seen from the Figure 1 (showing oligopolistic market),
thereby increasing the profits of the banking giants even more. However, the potential threat
of the four banks joining hand can be detrimental for the demand side players (Askar, 2013).
The situation can be however averted in presence of strict and anti-monopolistic
regulations on part of the government of the country, which should comprise of stricter
vigilance and eradication of unfair political practices as well as interest groups. The small
banks should also be provided support and sufficient securities by the government to increase
fair competition in the industry.

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Conclusion
From the above discussion it can be asserted that there exist oligopolistic trends in the
banking industry of Australia with the big four banks enjoying considerable market share and
working in form of a cartel like situation which contributes to their increased profit and
benefits. There also remains tendencies of further consolidation of the power of the banks
which can lead to a monopolistic trend in the market, which if happens can lead to even more
benefits of the banks at the cost of the welfare of their clients. This can however be averted if
the government of the country takes appropriate policies to combat the concerned situation.

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References
Askar, S. S. (2013). On complex dynamics of monopoly market. Economic Modelling, 31,
586-589.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
BBC.com. (2018). Why is Australia investigating its banks?. BBC News. Retrieved 6 April
2018, from http://www.bbc.com/news/world-australia-42983881
Frank, R., & Cartwright, E. (2013). Microeconomics and behaviour. McGraw Hill.
Fudenberg, D., & Tirole, J. (2013). Dynamic models of oligopoly. Taylor & Francis.
Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage
Learning.
Nytimes.com. (2018). Flush and Dominant, Australia’s Banks Come Under
Pressure. Nytimes.com. Retrieved 6 April 2018, from
https://www.nytimes.com/2016/10/15/business/dealbook/australia-banks-under-
pressure.html?mcubz=1
Pindyck, R. S., & Rubinfeld, D. L. (2014). Microeconomics.