2.1 The Importance of Competition Flashcards
Monopoly market definition
When one firm has 25% or more of the market
Why do governments encourage competition?
It can help to improve:
- Price
- Product range
- Customer service
Customers of the retail banking sector, being individuals or small to medium-sized enterprises would have to do what to have an influence?
Form a pressure group
Is the balance of power in favour of the provider or the consumer?
The provider
Effective competition definition
A situation where banks compete to serve customers well rather than exploiting lack of customer awareness
Banks in a situation where there is effective competition aim to do what?
- Provide good products that suit the needs of their customers
- Have reasonably priced products
- Have an ethical approach
Why are the actions of an ethical bank not entirely altruistic?
The bank will be offering a better deal and so attract more customers
For a situation in which effective competition exists, consumers must:
- Be well informed
- Willing and able to switch providers
Good competition definition
When there is a wide range of products available for the customer
Features of good competition:
- 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
Bad competition definition
A situation where there are few providers who are large and powerful with the objective to maximise sales.
Features of bad competition:
- 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
Example of bad competition:
PPI mis-selling in the financial crisis
Why were some PPI policies sold unsuitable?
- 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
Wasteful competition definition
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
What is the argument against wasteful competition?
The money may have been better saved and used to reduce the price of the existing product
Example of wasteful competition:
Advertising financial products on lots of different social media platforms can be a nuisance so the money may have been more effectively spent elsewhere
Four main types of personal current account that RBS offers:
- Select Account
- Reward Account
- Reward Silver Account
- Reward Platinum Account
Select Account features
- Normal personal current account
- Does not charge a monthly fee
Reward Account features:
- 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
Reward Silver Account features:
- Added rewards:
- European travel insurance
- Mobile phone insurance
- Ticket-booking service
- Taste card
- Preferential rates on travel money
- Costs £12 a month
Reward Platinum Account features:
- 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
When comparing products, the potential saver needs to consider:
- 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
