Theory of market structure

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Assignment 4

consists of one essay question (worth 10 marks) based on text material. Before attempting this assignment you are expected to have read Text chapters 1 to 10. You are encouraged to make use of additional sources. Sources used in your answer should be fully referenced in APA 6th style.

Answer the following question ensuring that you apply economic principles or theory related to the concepts of benefits, costs and market structure in which a firm operates to inform your analysis and support your decisions. Communicate your ideas with correct grammar, spelling and writing style and support your answer with diagrams and illustrative examples as necessary.

Question (10 marks)

Drawing on your knowledge of the theory of market structure – supplemented by appropriate media reports – comment on the statement of ACCC Chairman, Rod Sims, that the Australian finance sector is ‘a cosy banking oligopoly’ and explain what action could be undertaken to overcome the problems created by this situation.

Online submission via Turnitin is required for this assignment. Details will be provided by your subject lecturer.

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This assessment task will assess the following learning outcome/s:

• be able to make decisions that incorporate the relevant benefits and cost analysis.
• be able to explain and defend why it is important to understand the structure of the market in which a firm operates.

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Drawing on your knowledge of the theory of market structure – supplemented by appropriate media reports – comment on the statement of ACCC Chairman, Rod Sims, that the Australian finance sector is ‘a cozy banking oligopoly’ and explain what action could be undertaken to overcome the problems created by this situation.

In Australia, the banking sector is troubled and it is argued by ACCC chief Mr. Sims that regulatory plan should deal with the “cozy oligopoly” in order to prevent consumers. Before the publication of public inquiry report related to finance sector, the CEO of ACCC bank Sims Rod said that more competition in the market is required. This can prevent consumers. In Australia, four major banks i.e. ANZ Bank, common wealth bank of Australia, and national Australia bank. Rule the banking sector. These banks hold more than seventy-five percent of the market. As compared to smaller competitors, these banks have the opportunity of lower funding; they have implicit government assurance, and so on. Rod was of the view “Market economies only work properly if you have competition and we have to make sure there is more in banking” (Smyth, 2019). While talking to an interview agency he said “We have to fix the cozy oligopoly, they have to feel under threat” (Smyth, 2019).
The ACCC bank is planning to remove barriers in financial sectors for small competitors to facilitate healthy competition in the market. The strategies designed will advance “open banking”.  The fig 1 shows market share of big four banks dominating the Australian market (Smyth, 2019).

(Smyth, 2019)

The statement given by ACCC chief is very true. The banking sector of Australia needs to remove oligopoly in order to save consumers. Oligopoly is a market situation in which little number of firms operates. The concentration ratio helps measure the share of largest firms in the market. In a monopoly there is one firm, in oligopoly there are multiple firms. The oligopoly has enough number of firms which can affect one another in a significant manner. Like steel manufacturers, rail roads, oil companies, and so on were oligopolies of the past. In oligopoly, new parties are not allowed to enter the market, there is no innovation or the process of creativity is slow, the prices are high, and so on. These are the factors which are harmful for consumers (CHAPPELOW, 2019).

Firms can set prices in a cartel or collectively. Oligopolistic economies depend on the leading manufacturers when setting prices rather than looking at the market condition. The profits are higher because there is no competition in the market and firms can demand their own prices. Oligopoly is facilitated by capital expenditure, legal assurances by governments, and so on. A cartel can be defined as group of firms which collaborate with each other to make products and decisions related to prices. Cartel exists in a market when there are few firms and each form has a significant share in the market. To enhance their market influence and power, oligopolistic firms join cartel. The level of output is decided and each member firm affects the price and output (CHAPPELOW, 2019).

These are some of the conditions due to which oligopoly is not desirable. The government can take different steps to reduce oligopoly particularly in the banking sector of Australia.

The monopolies and oligopolies maintain their dominant position in the market because it is very difficult for new parties and firms to enter the market. There are many barriers for new firms. These barriers are meant to prevent new firms from entering the oligopoly of firms. The large scales of production by oligopolistic firms exploit the existing firms and deter the new entrants. The key sources are controlled and owned by largest firms in a sector which is a hurdle for new entrants. The setup costs are very high and new entrants fear that they cannot bear the initial cost and make profits. The sunk costs are high. Sunk costs include marketing costs, and so on, which cannot be recovered. This is a barrier for new entrants. The R and D costs are too much for new firms to enter the market. These costs require that the firm with largest reserves in terms of finance can lead the market.  This prevents new entrants and deters them. These are the absolute barriers which prevent new entrants from breaking the state of oligopoly (Barriers to entry, 2019).

But there are many artificial barriers like predatory pricing. In such pricing, the powerful firms deliberately lower prices of product to push new entrants out of the market. The strategy of limit pricing is also used by existing firms in which they set low price of a product and produce more output as compared to original demand of the market. This is a loss for new entrants because they cannot earn profit by lowering price of goods form actual price. The existing firms in oligopoly have a vast knowledge related to the market and consumers. This is a competitive advantage. Oligopolistic firms usually have a strong brand, and consumers have a sense of loyalty with them, as compared to new entrants. In oligopolistic markets, firms do not compete with each other, rather they collude. If these firms join with each other for their own return, they can have long term profits (Barriers to entry, 2019).

These are all the factors which the government needs to look. To solve problems of “cozy oligopoly” government needs to overcome barriers for new entrants.

Works Cited

Barriers to entry. (2019). Retrieved from https://www.economicsonline.co.uk/Business_economics/Oligopoly.html

CHAPPELOW, J. (2019). Oligopoly. Retrieved from investopedia: https://www.investopedia.com/terms/o/oligopoly.asp

Smyth, J. (2019). Australian regulator vows to tackle ‘cosy oligopoly’ of big banks. Retrieved from Financial times: https://www.ft.com/content/d940092a-25f2-11e9-8ce6-5db4543da632