EC102 Agricultural Economics Assignment Sample
Task
Question 4
Australian big four banks mortgage share during the pandemic had increased, driven by low interest rate, increase in the first home buyer’s grant including the one-off renovation grant.
Table -2 shows the Australian banks mortgage market share of the major financial institutions in 2020. Study Table-2, read the article to answer the following questions.
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Source: https://mozo.com.au/home-loans/articles/bank-of-mum-and-and-dad-report-2020
(a) Compare the characteristics of banking industry with the characteristics of oligopoly industry and justify whether the banking industry operates under oligopoly market structure.
(b) Indicate the different types of non-price competitive strategies used by the commercial banks in Australia. Why banks engage in non-price competitive behaviour.
Solution
Answer to question 4a:
Oligopoly market structure is such market where large number of buyers is present and the market, whereas only few sellers are selling goods and services. Uni assignment help, Characteristics of oligopoly market can be typically explained with the small number of large firms who dominate the market and influence the pricing decision (Kim et al., 2021). Considering the Australian banking sector, there are 7 banks who largely control the market (Erem, 2020). The "Big Four" banks in Australia, namely Commonwealth Bank, Westpac, ANZ, and NAB, collectively hold a substantial portion of the market share (Erem, 2020). These banks have a significant impact on the industry's competition and pricing dynamics. These four banks of Australia are considered as market leader and with their considerable market share, they influence the pricing as well. Moreover, oligopoly firm is characterised by the interdependence. As small number of large firms are present in the market, they do not collude with each other. Rather they prefer to create cartel to inflate the price and enhance their profit share. Same can be observed in case of the Australia banking industry with keeping the interest rate more or less identical across different banks. This allows Australian banks to remain interdependent on each other and a change in interest rate or product pricing led to action by alternative firms.
However, non-price competition in Australian banking industry is present like oligopoly market. Australian banks achieve differentiation through offering diversified products, technological services, product bundling and marketing strategies. Banks invest heavily in marketing and branding to attract customers and gain a competitive edge (Kim et al., 2021). Additionally with big four banks taking pricing decision in the form of setting interest rates that other firms follow it. This is typical nature of oligopoly where price leadership is presented. Oligopolistic markets exhibit price leadership, where one or a few dominant firms set the pricing trends for the industry (Kim et al., 2021). Lastly, existing firm pose a high barrier to entry in oligopoly market, and it is true for the Australian banking industry as well. Barrier in the form of initial setup cost, licensing, marketing cost, operation cost and other costs pose considerable obstruction for new entrants to enter Australian banking industry. This way, the banks of Australia fight within themselves and in presence of limited threat from new entrant they enjoy higher bargaining power as oligopoly market (Kim et al., 2021).
Considering the characteristics of Australian banking sector and oligopoly market characteristics, it is quite clear the Australian banking sector operates under oligopoly market structure. The dominance of a few large banks, high barriers to entry, interdependence among banks, non-price competition, and price leadership all align with the features of an oligopoly.
Answer to question 4b:
Banks in Australia indulge into non price competition through the marketing, technology innovation, product diversification, customer service excellence strategies. Through marketing via online and traditional marketing channels banks reach to their prospect consumers. Besides, banks of Australia leverage technological advancements to deliver convenient and efficient banking services (Wewege et al., 2020). They invest in robust online banking platforms, mobile banking apps, and digital payment solutions. By offering user-friendly interfaces, seamless transactions, and innovative features, banks aim to attract tech-savvy customers and retain existing ones (Barodawala, 2022). Additionally, introducing product bouquet or customised product serving like loan facilities, savings scheme allows the bank to gain uniqueness in business that allow it to gain competitive advantage. As the measure of customer service excellence, banks also offer reward and loyalty points that benefit the consumer through exclusive offers and incentivising them.
Australian banks indulge into non price competition due to various reasons; however, among them major is gaining competitive advantage. As the banking sector of Australia operate under oligopoly market, existing firms do not collude with each other. To gain competitive advantage, firms take non price strategies (Vives, 2019). Non price competitive strategies help the firm to differentiate themselves from their competitors by offering unique products, superior services, or technological advancements. Also, non-price competitive strategies help the banks to retain consumer and create value for consumer that aid in earning long term profitability (Bekisheva et al., 2021). By offering added value to customers, banks can charge premium prices for their products and services, leading to higher profit margins and long-term profitability.
Reference:
Barodawala, M. Y. A. (2022). NEO BANKING: AN INNOVATIVE WINDOW OF BANKING ARENA. https://www.gapinterdisciplinarities.org/res/articles/(27-33)%20NEO%20BANKING%20AN%20INNOVATIVE%20WINDOW%20OF%20BANKING%20ARENA.pdf
Bekisheva, Z., Serikbay, N., Umirzak, N., Zhurunova, A., & Duisembay, N. (2021). How to retain current and get new customers in banking industry. Consumer Behavior and patterns while choosing banks. http://repository.kazguu.kz/bitstream/handle/123456789/940/Group%2016.pdf?sequence=1
Erem, C. (2020). Bank of Mum and Dad report 2020: Meet Australia’s fifth biggest home loan lender. https://mozo.com.au/home-loans/articles/bank-of-mum-and-and-dad-report-2020
Kim, S. H., Lan, H., & Dobson, P. W. (2021). Identifying price-leadership structures in oligopoly. Oxford Economic Papers, 73(1), 350-370. https://ueaeprints.uea.ac.uk/id/eprint/73230/2/Kim_Hao_Dobson_Identifying_Price_Leadership_Structures_in_Oligopoly_OEP_accepted_version.pdf
Vives, X. (2019). Digital disruption in banking. Annual Review of Financial Economics, 11, 243-272. https://blog.iese.edu/xvives/files/2020/01/Digital-Disruption-in-Banking_Nov.2019.pdf
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