Of the four market structures: perfect competition, monopoly, oligopoly, and monopolistic competition, the banking industry in Australia can best be characterized as oligopolistic.
One could argue that the banking industry in Australia falls under monopolistic competition due to there being a variety of banks that offer slightly differentiated products in different locations. However, the Australian banking industry is dominated by four banks that hold more than eighty-percent of the market share.
Technically an “Oligopoly is a market structure in which a small number of firms has the large majority of market share. An oligopoly is like a monopoly, except that rather than one firm, two or more firms dominate the market. There is no precise
…show more content…
However, due to profit maximising greed, executive management within the given firms have a bigger incentive to undermine collusive agreements, which in turn causes the leading firms to compete with one another.
Even the chairman of the Australian Securities and Investment Commission (ASIC), Greg Medcraft, refers to the banking industry in Australia as an oligopoly via one of his quotes in an article published in The Australian (Gluyas, 2016) when Medcraft says “We’re in a market that is, frankly, an oligopoly.”
This contrasts with a report from the Reserve Bank of Australia (RBA) in which the RBA mentioned that there were “increasing levels of competition and market
…show more content…
However, if there is a price decrease, competitors are keen to that and will also reflect price decreases.
There are often shades of grey when attempting to classify an industry but based on what is known about the banking industry in Australia, it most closely ties to being an oligopoly. If one could create a new market structure called a ‘forced through legislation’ oligopoly, that might be better suited for the Australian banking industry. The Four Pillars Policy (Maddock, 2014) was designed to mitigate risk and to prevent banks from becoming too big to fail.
Essentially, it is legislation that prevents any of the ‘Big Four’ from merging with, or acquiring any of the other ‘Big Four’. The legislation does not prevent other mergers or acquisitions within the Australian banking industry. It is designed to promote competition amongst the ‘Big Four’. Promoting competition between four banks that control a sizable industry market share sounds a lot like having an oligopolistic market