Micro Economics

Questions

(a) In what ways does economic theory suggest that competition might be “prevented, restricted or distorted” in markets with high levels of concentration and the other features exhibited by the UK retail banking market?

(b) Do the provisional findings of the CMA suggest that the possible effects on competition that you identified in part (a) are actually present in the UK PCA and BCA markets? Why, or why not? [If there is no reference at all in the CMA report to a possible effect, say so.]

Notes for guidance

Microeconomics textbooks such as Besanko and Braeutigam will provide basic information on the relevant economic theory and the effects of concentration in a market like the one under consideration here. You may also want to consult industrial economics texts such as those on the reading list for this module.

For access to the CMA’s investigation into the UK banking industry, go to their website at https://www.gov.uk/cma-cases/review-of-banking-for-small-and-medium-sized-businesses-smes-in-the-uk#case-opened. This will provide a link to the “Summary of provisional findings report” mentioned above, but also to a lot of other evidence. You will probably find the “Issues statement” dated 12 November 2014 particularly useful.

Good answers will set out clearly, and draw upon, the particular features of the market structure being examined, both in the theoretical part (a) and the applied part (b) of the question. [For part (a) you will need to identify the “other features exhibited by the UK banking market”.]