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IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

Several Indian private banks offer broadly similar savings accounts but compete mainly through branding, service quality and digital features rather than interest rates. What does this behaviour best illustrate?

This illustrates non-price competition typical of oligopoly. Because rivals can quickly match price changes, banks avoid price wars and instead differentiate through branding, service quality and digital features, which is not what happens in a perfectly competitive market.

  1. APrice competition in a perfectly competitive market
  2. BNon-price competition typical of oligopolistic marketsCorrect
  3. CA natural monopoly with regulated prices
  4. DPerfectly elastic demand for each bank's product
  5. Absence of product differentiation

Explanation

With few interdependent firms, price cuts are easily matched and can start a price war. Firms therefore compete through branding, service and features. This is non-price competition, characteristic of oligopoly, and contradicts the assumption of homogeneous products in perfect competition.

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