Section: Microeconomics

Question 1

The Australian government has a four pillars policy for the banking sector in Australia. Basically, the policy means that the four largest banks in Australia (the "Big 4") are not allowed to merge with each other. Using your own independent research, briefly explain the reasons for this policy, and the advantages and disadvantages of this policy.

Question 2

Identify the market structure the Big 4 banks operate in. Justify your choice of market structure using the market characteristics used to classify markets. Explain how the Big 4 banks compete, and the nature of their interdependency.

Question 3

Consider a "game" between Commonwealth Bank (CBA) and ANZ Bank (ANZ) that the banks may participate in. The rules of the game are:

If both CBA and ANZ keep interest rates low, then they will both make a profit of $2.5b.

If both CBA and ANZ keep interest rates high, then they will both make a profit of $3.5b.

If one bank keeps interest rates low and the other keeps interest rates high, then the low interest

rate bank will make $4.0b profit and the high interest rate bank will make $2.0b profit.

Using these rules, solve this game for the Nash equilibrium (make sure to include your diagram and the logic you followed to solve the game). Is your outcome the best one for both CBA and ANZ? Explain your answer.

Thank you!