It has been argued that the UK banking system is an oligopoly ( http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/8266582/Big-banks-running-an-oligopoly-says-Virgin-Money-chief.html# ) .
a) Using appropriate diagrams and economic research critically discuss the extent to which this is the case b) What are the likely implications for consumers?
The UK banking system is an Oligopoly because there are a small number of companies in the industry to allow barriers to be raised against the entry of new firms. ‘It’s important that we have to make sure there’s no banks too big to fail’ (article). Although in an oligopoly its known for having just a few big firms in the industry the ‘virgins money chief’ thinks that banks should not be that big ‘I do believe banks should be smaller than the very big ones today’( article), she believes that by having smaller banks there will be more competition which could allow consumers to get the best deal due to more price discrimination and this would make the companies very competitive. In an oligopoly the companies produce almost identical goods, for example all the banks offer very similar if not the same services. ‘Its hard to say the market customers should be enjoying is in any way properly competitive , so that consumers get the best deal’ (article). This shows that although the banking industry has competition to some degree, it is not as competitive as it should be. Most of the competition between the companies in an oligopoly is in the marketing aspect of their particular brand. ‘Spending on advertising, sponsorship and product placement - also called hidden advertising – is very significant to many oligopolists. The UK's football Premiership has long been sponsored by firms in oligopolies, including Barclays Bank and Carling.’ (Higson, G. http://economicsonline.co.uk/Business_economics/Oligopoly.html) being recognised is very important for oligopolies as this is a major way to attract customers. ‘Oligopolists are likely to engage in much more extensive advertising…’, this is because their industry is very restricted and the few competitors they have are likely to have very similar prices and products, in order to stand out the only thing that would make companies unique and noticeable is their way of advertising. Oligopoly happens when just a few businesses between them share a big percentage of the industry. This is the case in the banking industry as ‘effective oligopoly of the 5 big banks’ There are two main differences that separate oligopoly from other market structures. Barriers to entry, oligopoly has various barriers to the entry so this makes the entry very restricted. Another difference is independence of the firms this means that they are equally dependant on one other, each company will be restricted by its competitors and every company in the oligopoly decisions will affect its competitors. ‘The degree of competition in the financial sector can matter for efficiency of the production of financial services, the quality of financial products, and the degree of innovation in the sector’ (journal) For example, if Lloyds decided to lower their interest rates this would automatically make the public want to join them so in order to prevent this, their few other large competitors will have to make a change in order for them to stay with them. In an oligopoly it is possible for companies to collude for example HALIFAX and Bank of Scotland did. It is much easier for companies to collude when factors such as, products and cost are very similar another reason it is easier to collude with a company that is already in the oligopoly industry is as the barriers are very restricted new companies will find it much harder to get into the industry.
This shows the kinked demand for a bank, it is kinked as it is under oligopoly. The kink in the demand curve...