2.1 The Importance of Competition

Question 1

Monopoly market definition

Answer 1

When one firm has 25% or more of the market

Question 2

Why do governments encourage competition?

Answer 2

It can help to improve:

• Price
• Product range
• Customer service

Question 3

Customers of the retail banking sector, being individuals or small to medium-sized enterprises would have to do what to have an influence?

Answer 3

Form a pressure group

Question 4

Is the balance of power in favour of the provider or the consumer?

Answer 4

The provider

Question 5

Effective competition definition

Answer 5

A situation where banks compete to serve customers well rather than exploiting lack of customer awareness

Question 6

Banks in a situation where there is effective competition aim to do what?

Answer 6

• Provide good products that suit the needs of their customers
• Have reasonably priced products
• Have an ethical approach

Question 7

Why are the actions of an ethical bank not entirely altruistic?

Answer 7

The bank will be offering a better deal and so attract more customers

Question 8

For a situation in which effective competition exists, consumers must:

Answer 8

• Be well informed

- Willing and able to switch providers

Question 9

Good competition definition

Answer 9

When there is a wide range of products available for the customer

Question 10

Features of good competition:

Answer 10

• Well designed products which respond to real customer needs
• Fair interest rates and fees
• Provider does not try to sell a product unless it is suitable
• Transparency - customer is given full information

Question 11

Bad competition definition

Answer 11

A situation where there are few providers who are large and powerful with the objective to maximise sales.

Question 12

Features of bad competition:

Answer 12

• Wide range of financial products but little product differentiation
• Superficial information about products - stress attractive features and hide disadvantages in small print
• Some products designed to bring in a profit

Question 13

Example of bad competition:

Answer 13

PPI mis-selling in the financial crisis

Question 14

Why were some PPI policies sold unsuitable?

Answer 14

• Low incomes meant that they could not afford the premium
• They were sold it at a time they took out a loan and led to believe that they would be approved for the loan only if they were to buy the PPI policy as well
• Sold policies on which they could not claim

Question 15

Wasteful competition definition

Answer 15

When a provider spends huge amounts of money on designing, branding and marketing a product that differs only very slightly from those of its competitors

Question 16

What is the argument against wasteful competition?

Answer 16

The money may have been better saved and used to reduce the price of the existing product

Question 17

Example of wasteful competition:

Answer 17

Advertising financial products on lots of different social media platforms can be a nuisance so the money may have been more effectively spent elsewhere

Question 18

Four main types of personal current account that RBS offers:

Answer 18

• Select Account
• Reward Account
• Reward Silver Account
• Reward Platinum Account

Question 19

Select Account features

Answer 19

• Normal personal current account

- Does not charge a monthly fee

Question 20

Reward Account features:

Answer 20

• Amount of money back on eligible household bills paid by direct debit
• Costs £2 a month
• To earn rewards you must pay in £1,500 a month

Question 21

Reward Silver Account features:

Answer 21

• Added rewards:
• European travel insurance
• Mobile phone insurance
• Ticket-booking service
• Taste card
• Preferential rates on travel money
• Costs £12 a month

Question 22

Reward Platinum Account features:

Answer 22

• Added rewards:
• Worldwide travel insurance
• Mobile phone insurance
• Green Flag UK car breakdown cover
• National Trust for Scotland membership
• Taste card
• Preferential rates on travel money
• Costs £19 a month

Question 23

When comparing products, the potential saver needs to consider:

Answer 23

• Rate of interest
• If a minimum deposit is required to earn the rate
• If regular deposits have to be made
• Amount of time interest rate is being offered for