Question

Question 13

Consider the market for banking services in Australia. Currently, the Australian banking industry is dominated by the big four banks. Identify the market structure the Australian banking industry most likely follows, and briefly explain why.

Q14 Given the market structure you identified in Question 13, are banks likely to make a profit in the long run? Briefly explain why.

Answer 1

Q.13

The Australian banking sector has four large banks, and they dominate the market. The four banks are very similar in their decision of pricing. Their moves are co-ordinated and they have managed to maintain market shares. The large banks have made it very difficult for smaller banks to enter and survive.

This clearly is an Oligopoly market structure. In fact, there are also signs of cartel formation.

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Q.14

If the four large banks are able to co-ordinate with each other, and dominate the market as a combined "monopoly", they can earn long term economic profits.

However, recently the oligopoly has faced some pressure. There are some forces which may break this cartel up:

• market forces of competition, due to existing players or new players
• cartel itself gets broken up due to poor co-ordination
• government regulations break up the cartel

If this happens, the market will become more competitive and the ability to earn long run profits will be quite low.