The Australian Banking Industry: An Oligopoly Market Structure Report

This report analyzes the oligopoly structure of the Australian banking industry, focusing on the dominance of the "big four" banks: Commonwealth, ANZ, Westpac, and NAB. It explores the market concentration, high entry barriers, and the resulting lack of competition. The report highlights the impact of this oligopoly on consumers, including high-profit margins for banks, limited product and service innovation, and asymmetrical responses to interest rate changes. The analysis includes economic theories related to oligopolies, the role of regulation, and recommendations for promoting competition, such as encouraging the entry of smaller institutions. The paper references data on market share, profit margins, and industry trends, concluding that the current structure potentially harms consumers and calls for regulatory interventions to foster a more competitive financial landscape. The report also discusses the history of the industry and the factors that contributed to the current market structure, including the impact of the GFC.

Running Head: OLIGOPOLY, MONOPOLY OR DUOPOLY STRUCTURE IN AUSTRALIA
Oligopoly, Monopoly or Duopoly Structure in Australia
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1OLIGOPOLY, MONOPOLY OR DUOPOLY STRUCTURE IN AUSTRALIA
Table of Contents
Introduction......................................................................................................................................2
Brief article story.............................................................................................................................2
Article insights with economic theories..........................................................................................3
Oligopoly in the banking industry...............................................................................................3
Effect of banking industry oligopoly...........................................................................................4
Recommendation.............................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

2OLIGOPOLY, MONOPOLY OR DUOPOLY STRUCTURE IN AUSTRALIA
Introduction
In Australia, imperfectly competitive market structure is found to exits in different areas.
In case of natural monopoly such as distribution of electricity and public utilities a single firm
serves the entire market. The industry like telecommunication, grocery supermarkets, airlines
and in few others few large players dominate the market giving it structure of an oligopoly
market. In some sectors like pharmacies and banking competition is prohibited by regulation
(Bloch and Bhattacharya 2016 ). As a result, revenue and market share are concentrated in hands
of few large firms. The paper discusses oligopoly structure in Australian banking and its likely
consequence on people and economy.
Brief article story
The banking industry in Australia highly concentrated. By driving out competition, the
four major banks captures lion share in the industry. As reported by Australian Competition and
Consumer Commission (ACCC) the banking structure in Australia has become a four pillar
system with a major players having huge power to influence production and price. With this the
baking industry had status quo of an oligopoly market, a market largely dominated by some large
players. There are several features of retail banking indicating that, the industry structure is far
from competition. The big banks in Australia have continued to maintain a high profit margin for
a considerable long period of time (thenewdaily.com.au 2018). The smaller players supplying a
relatively small range of goods and services are unable to challenge the position of the large
players in the industry. The report also mentioned that largest player in the industry has
successfully maintained a large profit margin with presence of significant entry barriers in the
industry.

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The less competitive environment had allowed the dominating players to exploit their
customers. The banks for example quickly raise interest rate in response to a high official cash
rate but does not lower the same when cash rate falls back to the original level. There is
longstanding asymmetry in in the cost structure. With lack of competition, there are not much
difference in products offered by different banks. No strong rivalry has been observed among the
big banks. This reduces any initiatives on part of these banks to introduce better service and
product to satisfy need of the customer in a better way. Consequently, a range of reform has been
proposed by ACCC to protect interest of the customers. The reforms include allowing small
institution to enter the financial system and relaxation in ownership cap of 15 percent. A number
to resistant measures are expected to come from the big banks like that observed in
telecommunication industry.
Article insights with economic theories
Oligopoly in the banking industry
Oligopoly defines a form of imperfectly competitive market structure where dome major
players found to enjoy a large share in the market. In such a market, there remains high entry
barriers for the new entrants (Tripathi, Tripathi and Koutsoyiannis 2017). The banking sector in
Australia is dominated by four big banks namely Commonwealth, ANZ, Westpac and NAB. The
four banks together held 80 percent of all owner occupied home loans and nearly 85% of housing
loans of the investors (theguardian.com 2018). In the banking industry competition is restricted
by regulation.

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Figure 1: Share of owner occupied house loans of different banks in Australia
(Source: theconversation.com 2018).
The dominance of big four banks in the Australian banking came into the scene mostly
after the GFC hit. The process began from 1990s to mid-2000s. During this time the industry
experienced a considerable increase in the share of non-bank lenders gaining support from
international lenders. This contributed to a significant reduction in home loans by 75%
(abc.net.au 2018). After the GFC hit, the cheap credit sources automatically dried up with
disappearance of non-bank lenders. This was the time when the economy saw consolidation of
four big banks. At times of crisis, a number of stability measures were undertaken to ensure
financial stability. These measure cane at the cost of unintentional prohibition of competition in
the banking industry.
Effect of banking industry oligopoly
In an oligopoly market, the dominant players generally engage in different price and non-
price competition. In the price competition each seller aims to set a lower price to enjoy a greater

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market share. The price competition in the oligopoly market leads to a price war which is
observed in oligopoly structure prevalent in grocery supermarket (Ara and Ghosh 2017). The
non-price competition in the market occurs in form of price discrimination, advertising,
improving product or service quality and others. Unfortunately, in case of Australian banking
because of lack of rivalry the banks have less interest in improving quality or range of product
and services (abc.net.au 2018).
Figure 2: Oligopoly market and economic profit
(Source: as created by Author)
The lack of competition provides the big bank to enjoy a considerably high margin of
profit. In 2017, profit earned by Commonwealth Bank stood at $9.9 billion followed by Westpac,

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NAB and ANZ having a respective profit margin of $7.4 billion, $6.48 billion and $5.7 billion
(thenewdaily.com.au 2018).
Recommendation
The concentration in banking industry resulted in exploitation of customer who are
unable to switch banks. In facts, the big banks are enjoying high profit not because of a high
quality product or service because their customers are left with only limited option. The banks
are interested in delivering profit towards the interest of shareholders rather than ensuring an
affordable price of credits (abc.net.au 2018). There measures should be taken to protect the
interest of the customers.
Regulation needs to be taken to promote competition in the banking industry. The small
institutions should be allowed to enter the industry. The small institution should be provided with
necessary support to compete in the concentrated banking sector.
Conclusion
Banking industry in Australia is highly concentrated with dominance of big four banks.
The big banks are successful in maintaining their dominating share in the industry. However,
concentration in the banking sector has put customers at the mercy of these banks. The banks
charge a high interest rate in time of rising cash rate but has no initiative to reduce interest while
cash rate goes down. The customer especially the low income ones suffers highly as they have
no other option to switch to other banks. The competitive measures thus need to be taken to
break the concentration and provide people a financial security.

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References
ABC News. (2018). Customers are at the mercy of banks, but we can make them care more.
[online] Available at: http://www.abc.net.au/news/2018-02-09/australian-banks-competition-
home-loans-banking-profits/9407480 [Accessed 5 May 2018].
ABC News. (2018). Supermarket wars: Are they just a repeat of the battle between Qantas and
Virgin?. [online] Available at: http://www.abc.net.au/news/2017-02-23/supermarket-price-wars-
shaping-up-as-a-repeat-of-airlines/8298012 [Accessed 5 May 2018].
Ara, T. and Ghosh, A., 2017. Tariffs, Vertical Oligopoly and Market Structure. Research
Institute of Economy, Trade and Industry (RIETI).
Bloch, H. and Bhattacharya, M., 2016. Promotion of innovation and job growth in small‐and
medium‐sized enterprises in Australia: Evidence and policy issues. Australian Economic
Review, 49(2), pp.192-199.
Jericho, G. (2018). The power of the big banks remains as they take advantage of customer's
loyalty | Greg Jericho. [online] the Guardian. Available at:
https://www.theguardian.com/business/grogonomics/2018/feb/08/the-big-four-banks-are-getting-
even-more-powerful-at-australians-expense [Accessed 5 May 2018].
The Conversation. (2018). Australia isn't dominated by big businesses that gouge customers:
Grattan report. [online] Available at: https://theconversation.com/australia-isnt-dominated-by-
big-businesses-that-gouge-customers-grattan-report-88465 [Accessed 5 May 2018].

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The New Daily. (2018). Big bank 'oligopoly' slammed for strangling competition | The New
Daily. [online] Available at: https://thenewdaily.com.au/money/finance-news/2017/09/20/big-
bank-oligopoly-slammed/ [Accessed 5 May 2018].
Tripathi, P., Tripathi, V. and Koutsoyiannis, A., 2017. Modern micro economics. Asian Journal
of Multidimensional Research (AJMR), 6(8), pp.28-31.