Australian Banking Sector An Oligopolistic Market †Free Samples

Question: Discuss About The Australian Banking Sector An Oligopolistic Market? Answer: Introduction: In economics, the term market signifies a place of interaction for the two types of economic agents, the buyers and the sellers. In other words, a market is the place where the demand and the supply forces, in terms of their inter-dynamics, determine the price and quantity aspects of a particular commodity or service. Type of market prevailing for a product, depends on factors like number of buyers and sellers, the entry exit conditions for economic agents, market power dynamics and others[1]. Based on these influencing factors, markets can be competitive (perfectly competitive being the hypothetical extreme) of imperfectly competitive, like monopoly, monopolistic competition and oligopoly (monopoly being the opposite of perfect competition). The assignment tries to analyze the type of market structure prevailing in the Australian banking industry. For research purposes it takes the article named, Flush and Dominant, Australias Banks Come Under Pressure, written by A. Odysseus Patric k, as reference[2] Storys Essence: The article finds that the Australian banking market, four major players in the supply side categorically rule though having many players, both in the supply side and the demand side. In fact, these four politically supported and immensely influential banks majorly shadow all other banks. These four players are the Westpac Bank, the Commonwealth Bank, the Australia and New Zealand Banking Group and the Australias National Bank. Among them, two banks, the Westpac Corporation and the Commonwealth Bank, especially its CommInsure wing, are worthy of special mention when it comes to the consolidation of market power in the hands of the players in the Australian banking industry[3]. The high concentration of the market power in the hands of these four big banks in the Australian banking market, indicates the presence of a clear oligopolistic structure in the concerned market. These players have been enjoying tremendous control over the banking sector and its pricing and other decisions for a long time and this, according to the article, has given rise to many unfavorable and unfair issues, specially affecting those on the demand side[4]. The four banks tend to work apparently in a cartel construct in the recent times and do pose as a credible threat to the distribution of market power as they have the potential to join hands together and work as a collusive monopolistic unit in the market. The article puts forward the negative side of this oligopolistic construct in the banking industry of the country. Due to the presence of immense market power and substantial political support, most of these big players have been found to misuse their power to fulfill their vested interest of personal profit maximization even if that comes at the costs of sufferings of their clientele[5]. The article puts forward as an example of this misusing of power, the instances of CommInsure, where the unit avoided claims of insurances by deleting medical evidences, unfairly influencing the doctors and other fraudulent activities. Other banks like the Westpac, has also evidences of manipulating their interest rates and claims design according to situations, to benefit monetarily, putting their customers in financial crisis. The banks have also behaved strikingly rudely and unfairly with terminally ill people to get away without paying their medical claims as were previously promised by the banks[6]. All these have given rise to tremendous dissatisfaction among the demand side agents and has become a primary concern of the government of the country as customers are losing confidence over the banking sector of Australia. The government has undertaken several strict vigilance reforms, regulations and punishing steps, while many more reforms are required to bring back the welfare quotient and confidence of the customers on this concerned industry[7]. Economic Analysis of the Situation: The oligopoly market can be distinguished with the help of its inherent characteristic of many buyers and a few sellers, the sellers experiencing strategic interdependence on each other. This implies the strategies and outcomes of one seller in this market highly depend on the decisions of his fellow sellers. The market can have two outcomes: depending upon the situation there can be a price war or there can be formation of a collusive agreement among the participating sellers[8]. Figure 1 : Oligopoly Market (Source: As created by Author) Due to the presence of the kinked demand curve in the oligopolistic, which is in turn a result of non-identical and varying price elasticity, there arises a gap between the cost levels of production and the price charged by the firm for their products. The firms, being only a few, enjoy this advantageous position over the buyers, who, being many in number, creates substantial demand for the product, thereby helping the firm to charge a higher price for their product than that would have been charged in the competitive situation. The outcome becomes even more favorable for the sellers if they come to a cartel agreement, thereby ruling out price wars among them. Together they enjoy higher profits and higher market power provided they do not cheat, which is inherent characteristic of an oligopolistic cartel. The current situation of the Australian banking market can be indentified with this construct[9]. However, if the firms join hands to become a monopolistic working together, their cost and price gap can increase even more as is shown in the diagram below: Figure 2: Long run in the Monopoly Market (Source: As created by the author) In the monopoly market, due to the presence of the aggravated cost-price gap, in the long run also the firm enjoys economic profit. This can be a potential threat for the buyers in the banking market of Australia if the four big player join hands for a monopolistic construct. Recommendations: To rule out the problems faced by the consumers in the Australian banking industry and to prevent any other future threats of consolidation and misuse of market power to substantial extent by any of the participating agents, a stricter and regulatory environment has to be set up by the governing authorities of the country. This should incorporate unbiased vigilance and actions in case of defaulting by any of the players. New players should also be encouraged and provided with sufficient securities in face of the competition they will face from the big ones[10]. Conclusion: In presence of market imperfections and asymmetric information structure, the party with lack of information is bound to suffer. This makes free market condition more desirable. However, in absence of free markets, proper reform, regulations, restrictions and unbiased governance of a market can help in proper distribution of market power and welfare of the participating agents, thereby making the market more equitable. The Australian banking industry can also incorporate the above mentioned reforms to make the situation better for the buyer group. References Allen, David E., and Robert Powell. "The fluctuating default risk of Australian banks."Australian Journal of Management37.2 (2012): 297-325. Feng, Yuan, Baochun Li, and Bo Li. "Price competition in an oligopoly market with multiple iaas cloud providers."IEEE Transactions on Computers63.1 (2014): 59-73. Kavurmacioglu, Emir.Oligopolies in private spectrum commons: analysis and regulatory implications. Diss. Boston University, 2016. Maine, Bob. "The relentless pursuit of bank profits."Green Left Weekly1120 (2016): 2. Marshall, Robert C., and Leslie M. Marx.The economics of collusion: Cartels and bidding rings. Mit Press, 2012. Nytimes.com A, 'Flush And Dominant, AustraliaS Banks Come Under Pressure' (Nytimes.com, 2017) https://www.nytimes.com/2016/10/15/business/dealbook/australia-banks-under-pressure.html?mcubz=1 accessed 29 August 2017 Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue.Economics: Principles, problems, and policies. McGraw-Hill, 2013. Tyers, Rod. "Service Oligopolies and Australia's Economy?Wide Performance."Australian Economic Review48.4 (2015): 333-356 [1] Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue.Economics: Principles, problems, and policies. McGraw-Hill, 2013. [2] A. Nytimes.com, 'Flush And Dominant, AustraliaS Banks Come Under Pressure' (Nytimes.com, 2017) https://www.nytimes.com/2016/10/15/business/dealbook/australia-banks-under-pressure.html?mcubz=1 accessed 29 August 2017. [3] Maine, Bob. "The relentless pursuit of bank profits."Green Left Weekly1120 (2016): 2. [4] Allen, David E., and Robert Powell. "The fluctuating default risk of Australian banks."Australian Journal of Management37.2 (2012): 297-325. [5] Maine, Bob. "The relentless pursuit of bank profits."Green Left Weekly1120 (2016): 2. [6] Tyers, Rod. "Service Oligopolies and Australia's Economy?Wide Performance."Australian Economic Review48.4 (2015): 333-356. [7] Kavurmacioglu, Emir.Oligopolies in private spectrum commons: analysis and regulatory implications. Diss. Boston University, 2016. [8] Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue.Economics: Principles, problems, and policies. McGraw-Hill, 2013. [9] Marshall, Robert C., and Leslie M. Marx.The economics of collusion: Cartels and bidding rings. Mit Press, 2012. [10] Feng, Yuan, Baochun Li, and Bo Li. "Price competition in an oligopoly market with multiple iaas cloud providers."IEEE Transactions on Computers63.1 (2014): 59-73.