Nov 6, 2017 in Business Category

The Role of Customers in Determining Competition

Competition is considered by economists as either rivalry between firms/industries or perfectly competitive market structure in pursuant to gain a greater share of the market through the process of selling and buying goods and services. This is in-line with international regulatory reforms of the 1980’s and 1990’s. Consequently, the aim of competition is to enable a firm to attain competitive advantage over other firms dealing in similar goods and services thereby ensuring efficient production. The concept of competition has been adapted by banks to eliminate inefficiencies caused by cartels (illegal joint sales) and collusions within the banking industry.

Although there are varied ways of measuring competition within the banking sector the traditional methods of measurements have remained the best methods of determining competition throughout the history. This is particularly based on the fact that even the contemporary methods which have been posted to determine the regulation and other consumer concerns are yet to produce reliable results. As such, market definition, analysis of market structure, Panzar-Rosse Tests and analysis of pricing behaviors are considered to be the best methods for measuring completion. In this paper, market definition and analysis of market approach structure are discussed in length as examples of methods of determining competition in banking.  

Market Definition: Market competition is an approach that evaluates density of financial institutions within the region of study. Its main consideration is the numbers of banks that are available in the region.

Benefits of Market Defining Method: Market definition embraces the fact that within any given financial-institution market, there exist an interrelationship between the structures conduct and performance of the said market. Secondly, market definition asserts that competition within the banking industry can only be measured if the banks in question are located within the same locality. This assertion is in-line with analogy that competition can only be compared the markets being examined are appropriate. In other words, competition can only be estimated appropriately if the markets being considered are located within a narrow region since markets differ geographically and by products.    

Failures of Market Definition Method:  Market defining does not consider the banks and their performance despite the inherent relationship between the geographical location of the banks and their performance. Therefore, whenever market definition is used to measure competition in banking industry, the assessors would definitely overestimate competition because of the likelihood that most banks operating in different geographical regions would possess diverse interest rates. Secondly, it is usually hard for investigators to determine the concentration o banks within the market of interest in a bid to measures its competitiveness.  

Analysis of Market Approach Structure:  This is a traditional method of measuring competition within the banking industry often focusing on analyzing the market structure. According to analysis of market approach structure, the level of competition within the banking industry is dependent on the market structure. This is owed to the fact that important determinants of market competition such as buyer Vs seller, product differentiation, market concentration, market composition and new entrants are components of market structure.    

Benefits of Analysis of Market Approach Structure: This approach is usually seen to be very simple because it involves simple empirical and theoretical practice. Secondly, the process examines how market’s observable features are related to the conduct and performance of the banks being evaluated.     

Failures of Market Approach Structure: First, measuring banking competition using analysis of market approach structure is usually cumbersome. This is owed to the fact that the level of competition of an industry such as banking cannot be obtained simply by analyzing the existing market structure. Secondly, the method is usually characterized by biases. That is, it only utilizes the analysis of market structure as the grounds for determining banking industry’s competitiveness. However, such approach is fatal given that no single market focused quantifier has ever offered the best measure for competitiveness.    

In conclusion, although competition within the banking industry is an important component of growth, productivity and efficiency, excessive and vigorous competition among banks often have adverse financial effect on the stability of banks since it is associated with risk taking. Owing to such plight, it advisable for investigators to consider all factors associated with banking such as the structure, market, and pricing behaviour before making a conclusion on the competitiveness of banks to avoid instances f cartels and collusions that undermines the motivation of the bank to invest in information acquisition for competitiveness. Competition is developed when customers are well-informed and knowledgeable of the products such as that offered by banking institutions.  And if there is competition, there is less likely to have oligopoly of power and consumers can choose what suited their needs.

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