Economic Essay Example | Topics and Well Written Essays - 2500 words

Economic - Essay Example 3 2.0 Economic Rationale behind Oligopolistic Behaviour in Banking Sector 4 3.0 Implications of an Oligopolistic Banking Sector on Consumers 7 4.0 Situation with the Australian Banking Sector 9 5.0 Conclusion 9 References 10 1.0 Introduction An oligopolistic market structure is characterised by a few sellers in the market but a large number of buyers. These contending firms are highly interdependent upon each other to strengthen their market status and hence, frame schemes to facilitate the same. Some of the commonest strategies include competition on prices and quantities being marketed by the firms1. In addition to competing with their peers, the firms also assume the role of creating artificial barriers, in the form of hefty license fees, to prevent the entry of potential competitors within the industry to restrict the number of market players. Such artificial regulations might be beneficial for the existing firms in the business though the purchasers always end up at the worse si de of things as lack of ample competition reduces the degree of consumer surplus that they could have enjoyed. The present paper takes up the case of the banking sector and attempts to emphasise the implications of oligopolistic market structure on bank customers. ... king sector to build an oligopolistic market framework; there are special references to empirical evidences from different nations in this regard as well. The third section is an illustration of the implication that an oligopolistic banking sector is likely to have over the residents of a nation. The fourth section depicts the situation in Australia where nationals have been immensely protesting against the oligopolistic banking sector and finally the last section summarises the contents of the entire paper. 2.0 Economic Rationale behind Oligopolistic Behaviour in Banking Sector A few advantages based on the economics of business are the reasons why firms tend to operate as an oligopolistic market. Those very factors could be applied to the banking sector as the reasons why the industry chooses to operate under such environment. Firstly, oligopolistic market structure makes room for economies of scale which associates huge amount of profit with each operating unit, owing to reduced a verage cost of production as the diagram alongside depicts. As the diagram shows, the average cost of production falls with rise in the quantity produced, though this reduction does not continue for very high quantities. The point where the combination of cost and quantity to be produced is found to be the optimal, i.e., highest production at the lowest cost, is the chosen one by the sellers. In the above diagram, this point coincides with E1 where the quantity to be produced is Q1 and the associated average cost is the lowest at AC1. This is one of the reasons why the larger existing firms restrict new entrants from moving into the industry. The smaller firms in the industry are often acquired by the larger to clear their path towards experiencing economies of scale. This in fact had been