Economics for Business: Australian Banking Sector Oligopoly Report

This report provides an in-depth analysis of the Australian banking sector, highlighting its oligopolistic market structure dominated by four major banks. It examines the characteristics of this oligopoly, including market concentration, barriers to entry, and the impact on competition and consumer welfare. The report delves into the application of economic theories to understand the sector's dynamics, discussing price and non-price competition. It further explores the role of the Australian Competition and Consumer Commission (ACCC) and proposes recommendations to enhance competition, such as allowing entry of smaller banks and supporting financial institutions to break the existing concentration. The conclusion summarizes the key findings and emphasizes the need for competitive measures to protect the interests of consumers within the Australian banking sector.

Running head: ECONOMICS FOR BUSINESS
Economics for business
Name of the student
Name of the university
Author Note

1ECONOMICS FOR BUSINESS
Table of Contents
Introduction:...............................................................................................................................2
Article review of the selected concept:......................................................................................2
Article Analysis: Insight from economic theories.....................................................................3
Recommendation........................................................................................................................4
Conclusion:................................................................................................................................5
References:.................................................................................................................................6

2ECONOMICS FOR BUSINESS
Introduction:
Oligopoly, monopoly and duopoly market structures within different segments of
Australia can be seen. For instance, electricity distribution and public utilities represent as
monopoly market while industries like banking, grocery super markets and
telecommunication perform under oligopoly market structure (Tyers, 2015). Moreover,
airlines of Australia operate their business with the characteristics of Duopoly market. Those
imperfect market conditions represent that few firms with large scale of operations enjoy the
entire market share and earn huge amount of revenue. However, this specified sector has
intended to discuss about the banking sector of Australia with the help of basic economic
concepts. Moreover, this report can provide some recommendations for this sector with the
help of which policymakers of this country can take new rules and regulations for the purpose
of economic welfare.
Article review of the selected concept:
Highly concentrated banking sector of Australia has drove out competition as four
major banks have captures significant market share within this industry. According to the
Australian Competition and Consumer Commission (ACCC), this specified banking sector
has adopted a four-pillar system, where few players have captured huge power for
influencing price and production (thenewdaily.com.au 2018). this structure of activities have
represented an oligopoly market, which has been dominated by four largest banks, namely,
National Australia Bank (Nab), Australia and New Zealand Banking Group (ANZ),
Commonwealth Bank (CBA) and Westpac (WBC) (Selmier, 2016). Several characteristics of
retail banking have indicated that this banking structure does not have any competition and
consequently, they have maintained a huge profit margin for a long period. This in turn has
negatively affected smaller players who have provided small range of services compare to
these four banks and consequently they have remained unable to perform and challenge the

3ECONOMICS FOR BUSINESS
position of those leading banks within the specified industry and this in turn has created
barriers to enter of those small banks within this sector.
This domination nature within the market has allowed those banks to exploit their
customers financially, for instance, through charging and maintaining higher rate of interest.
Moreover, lack of competition and rivalry has decreased the initiatives of those banks to
provide better service and product safety, which can help consumers in a better way (Bakir,
2017). Hence, ACCC has proposed to reform this banking sector through allowing other
small banks to enter make this market more competitive. Those small size firms have
relaxation regarding ownership cap of 15% (thenewdaily.com.au 2018).
Article Analysis: Insight from economic theories
Oligopoly is characterized as an imperfectly competitive form of market structure
having considerable dominance by some large firms (Cowen &Tabarrok, 2015). In lion share
of the market is captured by these large players. Market concentration has now become a key
characteristics of Australian economy. Oligopoly exists in a most prominent for in the
Australian banking sector. The four large players in the banking industry are ANZ, NAB,
Commonwealth Bank and Westpac. The combined share these four big banks is more than
80% in owner occupied home loans. In case of investors housing loan the share is even
higher (85%) (Tyers, 2015). In the oligopoly market, in order to maintain high profitability
the large firms impose high barriers to entry. In case banking industry, entry barrier has been
kept to a high level through imposition if strict rules and regulation.
The oligopoly in Australian baking has not been there always. The big bank grabbed a
considerable share after the attack of Global Financial Crisis. The process was initiated from
the period 1990s to the middle of 2000s. This was the time when non-banking institutions
received support from several international lenders. The growing share of non-bank lenders
resulted in a reduction in share of domestic banks. However, in the phase of global financial

4ECONOMICS FOR BUSINESS
crisis, confidence of international lenders had gone down. Most of the cheap credit sources
were disappeared as international investors pulled out their fund. This weakened the financial
sector depending on non-banking institutions. During this time the big four banks came at the
rescue of the economy (Moradi-Motlagh&Babacan, 2015). The central bank provided
significant support to the domestic banks in order to attain financial stability in the economy.
The supportive measures for domestic banks contributed to an increase in share of the banks
in financial activity. With growing share of big four players, banking industry gradually
transformed to an oligopoly structure.
Different form of price and non-price competition prevails in the oligopoly market.
The price competition occurs when one firms take the strategy of lowering its price in order
to reduce market share of others. On the other hand, advertisement, improvement of product
quality are the strategies involve in non-price competition (Taylor et al., 2014). In the
Australian banking, either of the four banks have any initiative to improve range of product
or service because of lack of rivalry exists among firms. The dominant market share allows
the four banks to maintain a high profit margin. Commonwealth Bank enjoys the largest
profit margin. Westpac, NAB and ANZ follow Commonwealth Bank in terms of profit.
Recommendation
The baking concentration in Australia leave customers at the discretion of the four
major banks. They have no option to switch to other banks. The banks maintain an
unnecessary high interest rate. Therefore, focus should be given on enhancing competition in
the market. Small banks and other lenders should be allowed to enter the industry to improve
product and service quality. Government should provide support to these financial institutions
to break concentration in the banking industry.

5ECONOMICS FOR BUSINESS
Conclusion:
The entire discussion can be summarised and described briefly within this part.
Banking sector of Australia, with its four largest banks, has formed an oligopoly market.
those banks have successfully maintained significant market share though their operational
activities have affected people of this country in a adverse way. For instance, those banks
have charged higher rate of interest when cash rate has increased but later they have not
showed any initiatives to reduce this rate again when the opposite situation has occurred.
Hence, competitive nature is required to protect the shelf-interest of low and middle-income
group of people through providing financial supports.

6ECONOMICS FOR BUSINESS
References:
Bakir, C. (2017). How do mega-bank merger policy and regulations contribute to financial
stability? Evidence from Australia and Canada. Journal of Economic Policy Reform,
1-15.
Cowen, T., &Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave
Macmillan.
Moradi-Motlagh, A., &Babacan, A. (2015). The impact of the global financial crisis on the
efficiency of Australian banks. Economic Modelling, 46, 397-406.
Selmier, W. T. (2016). Design rules for more resilient banking systems. Policy and
Society, 35(3), 253-267.
Taylor, T., Greenlaw, S. A., Dodge, E. R., Gamez, C., Jauregui, A., Keenan,
D., ...&Sonenshine, R. (2014). Principles of microeconomics. OpenStax College, Rice
University.
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].
Tyers, R. (2015). Service Oligopolies and Australia's Economy‐Wide
Performance. Australian Economic Review, 48(4), 333-356.
Tyers, R. (2015). Service Oligopolies and Australia's Economy‐Wide
Performance. Australian Economic Review, 48(4), 333-356.