Cost Analysis Essay On Oligopoly Market In Australia

Question

Task: 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

Drawing on your knowledge of the theory of market structure – supplemented by appropriate media reports commenton the statement of ACCC Chairman, RodSims,that the Australian finance sector is ‘acosy banking oligopoly ’and explain what action could be undertaken to over come the problems created by this situation.

This assessment task will assess the following learning outcome/s:
be able to make decisions that incorporate there levant benefits and cost analysis.
be able to explain and defend why it is important tounder stand the structure of the market in which a firm operates.
This assignment provides an opportunity for you to present a detailed analysis of the operation of firms in a particular market context through the application of your knowledge of theory supported by evidence drawn from sources of your choosing.

Answer

Introduction
The concept of cost analysis explored in this cost analysis essay can be considered as the backbone of any business and it helps to get a more convenient expenditure pattern and the expense can be managed effectively. Cost analysis has different benefits in a corporate life and it comes with different types of costs. The costs such as the marginal opportunity costs and the other costs are important for the companies to analyse. Competition in market is another concept of making profit in the company and it is helpful to demonstrate a business patter. In this report several types of costs and the competition in the market will be explained .

The objectives of this cost analysis essay are to find out details of banking and oligopoly industry in Australia. Demand and supply theory will be applied in the industry and the benefits cost analysis will be explained. This essay will provide a learning about the oligopoly market in Australia and the competition in this market. Efficiency of oligopoly will be explained with proper evidence will be presented in this essay.

Analysis
Demand and supply theory is important and applicable everywhere in the economic field. It helps to know how the demand of the products is affecting the production in a company. Price elasticity of demand is the change in the quantity of demand with respect to the price of the products (Eastin & Arbogast, 2019). Some of the products that are from basic need of people do not change much as people need it for being alive but in some cases the prices of the products change a lot and the changing in price results in changing the demand of those products. For example, if the price of petrol increases, people will buy the cars less and people will try to spend less on the petrol. It will in return increase the supply of petrol.

As per the theory of demand and supply in economics (2018), the demand of all people depend on few companies in the oligopoly industry. The banking sector of Australia is totally dependent on four large banks such as Commonwealth Bank, Westpac Banking corporation, Australia and New Zealand Banking Group and National Australian Bank. The profitability of banking industry is high in long run as threats of new entrants is low in this market due to high entry cost.

Figure 1: Profitability in Australian banking industry
(Source: Home.kpmg, 2019)

From the above diagram, it can be seen that the profit before tax in the banks have been same for a long period but the profit after tax has increased with time. It denotes that the cost of this industry is getting reduced and amount of profit is getting increased. This industry is becoming more sustainable with time and the efficiency of oligopoly is also high. The demand of banking industry depends on the government rules related to tax and interests. Economic situation of Australia is good and it seems that the interest rates of the country do not have negative effect on the industry. Inflation of the country is in control.

Oligopolistic market consists of some firms that dominate the entire market. In this market concentration ration is used to measure the share of the largest firms. In this market, no upper limit exists for the numbers of firms but the entire market is dominated by some of the firms (Na, 2015). Dilemma of prisoner is a symptom that is felt by the companies in this market. This market mainly runs by the government policies and the policies affect this market highly. Some of the examples of oligopoly industries are steel manufacturers, oil companies and the rail roads.

Entry cost in the oligopoly market mentioned in this cost analysis essay is very high and capital expenditure is also high in this market. In the steel manufacturing industry entry cost is very high like other oligopoly industries but the popularity of mini-mills are making a tough competition with the oligopoly industry. Oligopoly market is more stable than the other markets in the economy. The reason behind the stability of this market is running with government policy and high entry cost. High entry cost makes the company popular and the profit of the company becomes higher than the cost (Pettinger, 2019). As the profit is higher, the sustainability of these companies are much higher than the other companies and this market has huge contribution in the growth rate of the economy. The oil companies are also considered as pillars in the countries that produces oil.

The initial investment in these companies is very high and the business reaches up to a higher level and game theorists have name a symptom to the companies that Prisoner dilemma (Giraldeau & Caraco, 2018). Prisoner dilemma means the feeling of being like a prisoner in this market. As the initial investment is very high due to high entry cost, the exit from this market also becomes very tough. If a company fails to gain profit in this market, it becomes more difficult for them to get out of this market. This dilemma of unable to go out from this market is called prisoner dilemma of the companies. Government always interferes in this market if any fixing of prices is done by the companies but still price fixing is done in market easily.

As per the information provided in this cost analysis essay, oligopoly market can easily adopt competitive strategy and the innovation and efficiency is higher in the oligopoly market. Maximum portion of the profit in oligopoly market goes into research and development and the consumers can be benefitted in this market with higher quality products in lower prices (Giraldeau, & Caraco, 2018). As the companies spend a lot of amount in research and development, the quality of products from this market is better than the other markets. Stability of price is more in this market as the prices of the products are generally higher than other market. Planning becomes easier by this and the expenditure can be stabilised by the strategy of oligopoly market. The consumers of this market are more enriched in information and the companies under this market shares more transparency about their companies through the financial reports.

It helps the consumers to gain trust about the companies. This market allows the products to be developed several times and whenever it wants. For example, when Apple first invented their iPhone, it was totally different than what is now. The company has collected data from the consumers related to their choices and improved the phone. Likewise all the other markets oligopoly market also has some disadvantages such as higher concentration of the products. In this market, consumers are not free to choose as the numbers of operating companies are very few. Collusion within the companies can take place for reducing the competition in this market. The decision making in this market can be biased and the competition in this market can be unhealthy. The existing companies can create barriers for the companies to reduce their competition. The government licensing can be strict and it can restrict several businesses if it wants. In case of patent or proprietary method the start-up cost of the companies will be higher and working together will make the companies to have the distribution channels and the suppliers.

Pricing power in the industry of oligopoly is the main advantage as the prices can be set by the company itself. The average rates of interest have been lifted by the top banks in this country. Cost on consumers has been increased and it is one of the most important reasons of increasing profitability. Oligopoly banking sector of Australia do not have aggressive competition and the resilience of ADI has been improved with the reformation of financial sector. Requirement of capital and liquidity have been increased and amount of entrepreneurship has been increased in the country which is another reason of increasing profitability. After the Global Financial Crisis discussed in this cost analysis essay, the shares of the assets in Banking industry have been increased and the return on the liquid assets was less than 1% (Review of the Four Major Banks – Parliament of Australia , 2019). On the other hand the return of residential mortgages was higher than this as the prices of land and property were increasing in the country.

Amount of debt has been increased after the global financial crisis and the banks were in pressure. Due to this, the costing of consumers increased and the rates of interest have been increased. It has helped the banking sector to manage the payments. APRA has managed the competition in banking industry efficiently and no competition has been promoted within the companies. The regulatory authority has been concentrated on monitoring the competition within the banking companies and rules and regulations used to be made according to the market situation. A dedicated team has been allocated for the industry and the mortgage standard in the industry has been increased.

The rate of interest in the country was more favourable for the mortgage holders than the shareholders of the companies (Review of the Four Major Banks – Parliament of Australia., 2019). Changes in price in other banks are notices by other banks always. Making more lucrative financial schemes to the customers is the main target of the banking companies perform under this market. The gap between interest rates and cash rates within the small companies has been increased and it has been helpful for the economic growth of the country.

Figure 2: Spread between consumer and credit products
(Source: Division 7A - benchmark interest rate., 2019)

The above graph mentioned in this cost analysis essay states that the sales of credit cards in standard rate has been increased and increasing sales of credit card has helped to boost the income of banking organisations. In case of the other rates, it can be stated that the graph of selling all the banking and financial products are upward. The companies are more concern about the pricing of other banks rather than increasing the market share. High horizontal and vertical integration of the banking corporation has given them a cost advantage and the government banks get higher credit rating from the credit rating authority because of the government guarantee. Total amount of guarantee to the large banks were $3.7 and the IRB model produce lower risk investment portfolio for the customers and it helps to boost the income of the banking companies (McKinnon, 2019).

Figure 3: Weighted average funding costs for the major and other Australian banks
(Source: McKinnon, 2019)

From the above graph provided in this cost analysis essay, the cost advantages of the major banks can be seen and it can be seen that the cost of funding is less in the major banks of Australia and lower cost is more secured for the customers. High entry barrier of the oligopoly industry makes the competition lower and the variability of the capital requirement is high in the companies. The IRB model is helpful for the major banks to hold minimum $19 billion less capital than the other domestic banks.

Conclusion
The cost analysis essay outlines different concepts of economics and it is helpful to understand he economic competition and concept of demand and supply within the oligopoly market in Australia. Demand and supply are interdependent and the price elasticity of demand is another important concept of economics. Different types of demands exist in the market and changes in prices affect the demand of the product. Availability of substitute products also have an impact on the demand and supply of the products. This essay has outlined the demand and supply theory with detailed diagram and the concept of long and short run profit applying on the banking industry of Australia. After the demand and supply the economic competition in the market has been explained with the benefit of cost analysis. Ideas of different costs and the explanation of cost analysis has been given in this essay

Reference List
Division 7A - benchmark interest rate. (2019). Ato.gov.au. Retrieved 1 September 2019, from https://www.ato.gov.au/Rates/Division-7A---benchmark-interest-rate/.

Eastin, R. V. & Arbogast, G. L., (2019). Cfainstitute.org. Retrieved 29 August 2019, from https://www.cfainstitute.org/-/media/documents/support/programs/cfa/prerequisite-economics-material-demand-and-supply-analysis-intro.ashx.

Giraldeau, L. A., & Caraco, T. (2018). Social foraging theory. Princeton University Press from: https://books.google.co.in/books?hl=en&lr=&id=x_1ZDwAAQBAJ&oi=fnd&pg=PP1&dq=prisoner%27s+dilemma+theory&ots=AOE46lkjhX&sig=NpRpmfhgqSOHzuf6kZxhE5w-w-4#v=onepage&q=prisoner's%20dilemma%20theory&f=false.

Haanwinckel, D. (2018). Supply, Demand, Institutions, and Firms: A Theory of Labor Market Sorting and the Wage Distribution.

Home.kpmg, (2019). Major Australian Banks. Retrieved 1 September 2019, from https://home.kpmg/content/dam/kpmg/au/pdf/2018/major-australian-banks-full-year-2018-results-analysis.pdf.

McKinnon, T., (2019). Rba.gov.au: Developments in Banks' Funding Costs and Lending Rates. Retrieved 1 September 2019, from https://www.rba.gov.au/publications/bulletin/2018/mar/pdf/developments-in-banks-funding-costs-and-lending-rates.pdf.

Na, N. (2015). cost analysis essay On competition in economic theory. Springer from: https://books.google.co.in/books?hl=en&lr=&id=ouywCwAAQBAJ&oi=fnd&pg=PA1&dq=oligopolistic+competition+theory&ots=HyTtxfxo5N&sig=gji3-uNddaQuMEa2z-znCuo3fRk#v=onepage&q=oligopolistic%20competition%20theory&f=false.

Pettinger, T. (2019). Oligopoly | Economics Help. Economicshelp.org. Retrieved 29 August 2019, from https://www.economicshelp.org/microessays/markets/oligopoly/.

Review of the Four Major Banks – Parliament of Australia . (2019). Aph.gov.au. Retrieved 1 September 2019, from https://www.aph.gov.au/Parliamentary_Business/Committees/House/Economics/FourMajorBanksReview.

Whelan, J. & Msefer, K., (2019). Ocw.mit.edu. Retrieved 29 August 2019, from https://ocw.mit.edu/courses/sloan-school-of-management/15-988-system-dynamics-self-study-fall-1998-spring-1999/readings/economics.pdf.