BUSINESS ECONOMICS

UK Banking System an Oligopoly

UK Banking System an Oligopoly

Introduction

Oligopoly is the type of a market structure where few producers dominate the market and some degree of power in the industry. The oligopolistic industry is characterized by the barriers to entry and interdependence on the other firms. An oligopolistic firm has to consider the reaction of the other suppliers when deciding to implement changes in prices. The product or services of the producers are similar or identical in oligopolistic market (Phlips, 1983, Pp. 278-280).

UK banking system is argued to be an oligopoly of five big banks. As there are few companies in this market, the barrier to entry in the market can be raised, giving few firms the market power. Plus, all the banks provide with similar services, if not identical. They are operating 90% of the current account market and more than 90% of the SEMEs market. The competitors are to be assessed if they have the ability to enter the market to make sure that the UK banking system is an oligopoly (James , 2003, Pp. 1-77. ). A new entrant, Virgin Bank claims that five banks are dominating the banking sector. The purpose of the study is to assess the UK banking system as an oligopoly.

Discussion

An oligopoly firm is when a combination of few powerful firms dominates the market industry. As the UK banking system is dominated by five big banks that have a control of 90 % of the current account market, it denotes the power of these banks in the industry. The power in the market can be seen in many ways such as the market share, the ability of the firm to make supernormal profit or abnormal profit in the long term (James , 2003, Pp. 1-77. ). This market power allows raising the barriers to entry of a new firm. In the case of UK banking system, five big banks are leading the market. However the oligopoly increases the interdependence and one cannot change the prices.

The interdependence can be clearly seen in the kinked demand curve. The oligopolistic market structure has the kinked demand curve (Earl , 2005, Pp. 1-592).

Kinked Demand Curve Diagram

If a firm decides to increase the price from p1, the customers will switch to the firms that are offering lower price than the p1. This will result a loss in the market share as this part of the demand curve is elastic and an increase in price will decrease the revenue to a large extent (Puu, 2011, Pp. 15-25).

However if the firm decreases its price from p1, the assumption is that the demand will increase leading to a greater market share. As the firm cut down the price, other firms will follow and reduce their prices as well. This will result in a small increase in the demand, as the consumer will have the options of the other firms. The demand is inelastic leading to greater revenue fall as the prices are ...