Calculation time! CMA recommends banks provision of current accounts should be investigated

Today’s announcement that the Competition and Markets Authority (CMA) are recommending that the High Street Banks’ provision of current accounts should be investigated for lack of competition may not surprise many. The case study may be valuable when looking at competition in oligopolistic markets and a report can be found from this link. The BBC take on the story can be found from this link.I also thought it offered a chance to do some calculations! Given my current theme of bringing the new levels of assessment of numeracy and quantitative methods in the 2015 specifications of A level economics ever increasingly to the attention of our teaching community, where better to do some number work than when looking at market share in the banking industry!

Today’s report from the CMA highlights the following market share (rounded up percentages) held by the major UK banks with regards to provision of current accounts (as of 2013):

These statistics can be used for creating concentration ratios or for calculating the Herfindhal-Hirschman Index (HHI) – both highly feasible questions in the new spec economics exams (the specimen papers have included concentration ratios already).

A 3-firm concentration ratio adds together the market share of the top three firms in the market (as the 4-firm adds up the top four firms and the 5-firm adds up the top five). Give your students the table above and ask them to calculate the 3, 4 and 5 firm concentration ratios (answers below).

What does this mean? There are no hard or fast rules about what the totals will mean but if the ratios are between 50 and 80% the market is said to have a medium level of concentration (suggesting that the market is oligopolistic) and if the number is above 80% then the market is highly concentrated (causing regulators concern that the market may not be acting in the publics’ interest).

The Herfindhal-Hirschman Index (HHI) attempts to take into account the individual market share of the firms. It does this by squaring the market share values for each of the firms and adding the totals together.

Ask your students to calculate the HHI using the same table above (treating the ‘other’ category as a single firm to avoid confusion).

The HHI classifies any market with a score of over 1000 as being concentrated and any value above 2000 as being highly concentrated.

For further analysis, the CMA offers reasons for why they consider the current account market is causing concern and why competition is not so great.

Answers:

3-firm concentration ratio: 64%

4-firm concentration ratio: 76%

5-firm concentration ratio: 86%

Herfindhal-Hirschman Index (HHI): 1788