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Ups Vs. Fedex

Essay by   •  December 19, 2010  •  Case Study  •  1,972 Words (8 Pages)  •  1,152 Views

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Contents Page

Introduction 1

Jamaica's Banking Sector 2-3

Non-Price Competition 4

Interest Margin 5

Customer Choice 6

What is Interest Rate 7-10

Graphs

Tables

Conclusion 11

Bibliography 12

Introduction

Since the early 1990s, the Jamaican banking sector has experienced significant structural changes stemming from a disorderly financial liberalization process, which preceded a severely disruptive financial crisis. As such, the last decade has important lessons about factors influencing the relationship between competition and concentration, which has been unexplored. Over the last few months commercial banks have been under fire for their high-loan interest rates and wide spread between their fixed deposits savings accounts and lending rates.

Commercial banks within Jamaica operated under an Oligopoly market structure because there are not many commercial banks and the decision of one affects all the others. The banks use non-price competition to compete against each other not necessarily with price but mainly through promotional strategies.

Jamaica's Banking Sector

Jamaica's approximate 2.5 million bank customers enjoy the benefits of strong competition in a deregulated banking system. The dilemma is that we only get benefits from non-price competition while the real benefits of lower lending rates and higher deposit rates are nothing but a fleecing illusion to be pursued but never attained. Jamaica commenced moving from a regulated banking system to a more open competitive sector in the 1990s. While competition has affected many areas of the banking industry, there are two areas that illustrate this change more than others: marketing promotions and product choice. This competition however, has not brought about significant savings for customers due to the Oligopoly market conditions that exists, thus a much narrower choice of commercial banks are now available to the Jamaicans.

In an Oligopoly industry, there are only a few firms between them share a large proportion of the industry. Unlike firms under Monopolistic competition, there are various barriers to the entry of new firms, the size of the barriers, however, will vary from industry to industry. Because of the small numbers of firms under oligopoly, each firm will have to take account of the others action, they are interdependent. This means that each firm is affected by its rivals' actions. If one firm changes its product price or alters another part of its marketing strategy, it will have significantly impact in the rival firms. In other words, if one bank lowers its lending rate, the other banks in this industry will be affected, and they most likely will lower their rate, too. If this happens, neither company will gain a competitive advantage. Therefore, no bank can afford to ignore the actions and reactions of other banks in the industry.

Under oligopoly, the interdependence of banks may make them wish to collude with each other. If they could club together and act as if they were a monopoly, they could jointly maximise industry profits. On the other hand, they will be tempted to compete with their rivals to gain a bigger share of industry profits for themselves.

Commercial banks in Jamaica under oligopoly engage in collusion, they agree on a base (minimum) lending rate among themselves, market share, advertising expenditure and so on. It will reduce the fear of engaging in competitive price-cutting or retaliatory advertising, both of which could reduce total industry profits.

Non-Price Competition

Non-price competition is a marketing strategy in which one firm tries to distinguish its product or service from competing products because of attributes like design and workmanship. The firm can also distinguish its product offering through quality of service, extensive distribution, customer focus, or any other sustainable competitive advantage other than price. To be contrasted with price competition, which is where a company tries to distinguish its product or service from competing products based on low price? Non-price competition typically involves promotional expenditures, (such as advertising, selling staff, sales promotion, coupons, special orders, or free gifts), marketing research, new product development, and brand management costs.

Jamaican commercial banks engage in non-price competition, in spite of the additional costs involved, because it is usually more profitable than selling for a lower price. In the worst case scenario, banks will start to lower prices resulting in a price war, that's what the burrowing public would love to see happen someday soon. Although any company can use a non-price competition strategy, it is most common among oligopolies.

Interest Margins

Due to the lack of effective competition in the market, homebuyers have had to pay out hundreds of thousands of dollars to service high interest mortgage debts each year. Interest margins, which, taken together, represent the difference between what banks pay on deposits, and what they earn on loans.

Commercial banks have been heavily criticized for the large spread they receive at the expense of their customers and in particular to the detriment of the country's economic development. The Jamaica Manufacturers Association frequently express their disgust about how banks treat their sector. Manufacturing is important to any developing country's economic success, but they cannot get the chance to grow because they cannot afford cost of burrowed funds. The banks asking rate is a deterrent to manufacturing in Jamaica. Several times the Bank of Jamaica has reduced rates to the commercial banks but they have not passed on the savings to the burrowing public. The local banks have been labelled as being spineless. They offer more attractive lending rates for motor vehicle loans than they do for manufacturing. The banking sector's argument is

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