OBJECTIVE

To explore more about the monopoly form of market and to study in detail about its characteristics and to evaluate the various advantages and disadvantages of same. Also, to carry out research on Indian Railways with context to its monopoly position in the railway sector, How it carries out its dominant role in the market and how sometimes it abuses this power. An attempt is also made to discuss the various challenges faced by the indian railways in the country.

INTRODUCTION

The word Monopoly is derived from the combination of two greek words i.e. ‘Monos’ meaning single and ‘Polus’ meaning a seller. Monopoly, hence, refers to a market situation where there is a single seller selling a product which has no close substitutes. Monopolies can be established by a government, form naturally, or form by integration.  Monopolies are thus

characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods.

Features of Monopoly:

Primary characteristics of a monopoly

Single Sellers

A pure monopoly is an industry in which a single firm is the sole producer of a good or the sole provider of a service. This is usually caused by barriers to entry.

No Close Substitutes

The product or service is unique in ways which go beyond brand identity, and cannot be easily replaced (a monopoly on water from a certain spring, sold under a certain brand name, is not a true monopoly; neither is Coca-Cola, even though it is differentiated from its competition in flavor).

Price Maker

In a pure monopoly a single firm controls the total supply of the whole industry and is able to exert a significant degree of control over the price, by changing the quantity supplied (an example of this would be the situation of Viagra before competing drugs emerged). In subtotalmonopolies (for example diamonds or petroleum at present) a single organization controls enough of the supply that even if it limits the quantity, or raises prices, the other suppliers will be unable to make up the difference and take significant amounts of market share.

Blocked Entry

The reason a pure monopolist has no competitors is that certain barriers keep would-be competitors from entering the market. Depending upon the form of the monopoly these barriers can be economic, technological, legal (e.g. copyrights, patents), violent (competing businesses are shut down by force), or of some other type of barrier that completely prevents other firms from entering the market.

The advantages of monopolies

Monopolies can be defended on the following grounds:

They can benefit from economies of scale, and may be ‘natural’ monopolies, so it may be argued that it is best for them to remain monopolies to avoid the wasteful duplication of infrastructure that would happen if new firms were encouraged to build their own infrastructure.

Domestic monopolies can become dominant in their own territory and then penetrate overseas markets, earning a country valuable export revenues. This is certainly the case with Microsoft.

According to Austrian economist Joseph Schumpeter, inefficient firms, including monopolies, would eventually be replaced by more efficient and effective firms through a process called creative destruction.

It has been consistently argued by some economists that monopoly power is required to generate dynamic efficiency, that is, technological progressiveness. This is because:

1) High profit levels boost investment in R&D.2) Innovation is more likely with large enterprises and this innovation can lead to lower costs than in competitive markets.3) A firm needs a dominant position to bear the risks associated with innovation.4) Firms need to be able to protect their intellectual property by establishing barriers to entry; otherwise, there will be a free rider problem.5) Why spend large sums on R&D if ideas or designs are instantly copied by rivals who have not allocated funds to R&D?6) However, monopolies are protected from competition by barriers to entry and this will generate high levels of supernormal profits.7) If some of these profits are invested in new technology, costs are reduced via process innovation. This makes the monopolist’s supply curve to the right of the industry supply curve. The result is lower price and higher output in the long run.

The disadvantages of monopoly to the consumer

Monopolies can be criticised because of their potential negative effects on the consumer, including:

1. Restricting output onto the market.2. Charging a higher price than in a more competitive market.3. Reducing consumer surplus and economic welfare.4. Restricting choice for consumers.5. Reducing consumer sovereignty.

Sources of monopoly power

Monopolies derive their market power from barriers to entry – circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry; economic, legal and deliberate.

Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.

Economies of scale: Monopolies are characterized by decreasing costs for a relatively

large range of production. Decreasing costs coupled with large initial costs give

monopolies an advantage over would-be competitors. Monopolies are often in a position

to reduce prices below a new entrant's operating costs and thereby prevent them from

continuing to compete. Furthermore, the size of the industry relative to the minimum

efficient scale may limit the number of companies that can effectively compete within the

industry. If for example the industry is large enough to support one company of minimum

efficient scale then other companies entering the industry will operate at a size that is less

than MES, meaning that these companies cannot produce at an average cost that is

competitive with the dominant company. Finally, if long-term average cost is constantly

decreasing, the least cost method to provide a good or service is by a single company.

Capital requirements: Production processes that require large investments of capital, or

large research and development costs or substantial sunk costs limit the number of

companies in an industry. Large fixed costs also make it difficult for a small company to

enter an industry and expand.

Technological superiority: A monopoly may be better able to acquire, integrate and use

the best possible technology in producing its goods while entrants do not have the size or

finances to use the best available technology. One large company can sometimes produce

goods cheaper than several small companies.

No substitute goods: A monopoly sells a good for which there is no close substitute. The

absence of substitutes makes the demand for the good relatively inelastic enabling

monopolies to extract positive profits.

Control of natural resources: A prime source of monopoly power is the control of

resources that are critical to the production of a final good.

Network externalities: The use of a product by a person can affect the value of that

product to other people. This is the network effect. There is a direct relationship between

the proportion of people using a product and the demand for that product. In other words

the more people who are using a product the greater the probability of any individual

starting to use the product. This effect accounts for fads and fashion trends. It also can

play a crucial role in the development or acquisition of market power. The most famous

current example is the market dominance of the Microsoft operating system in personal

computers.

Legal barriers: Legal rights can provide opportunity to monopolize the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good.

Deliberate actions: A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force.

In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. Great liquidation costs are a primary barrier for exiting. Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A company will shut down if price falls below minimum average variable costs.

Types of Monopoly

Natural monopolyA natural monopoly is a distinct type of monopoly that may arise when there are extremely high fixed costs of distribution, such as exist when large-scale infrastructure is required to ensure supply. Examples of infrastructure include cables and grids for electricity supply, pipelines for gas and water supply, and networks for rail and underground. These costs are also sunk costs, and they deter entry and exit.In the case of natural monopolies, trying to increase competition by encouraging new entrants into the market creates a potential loss of efficiency. The efficiency loss to society would exist if the new entrant had to duplicate all the fixed factors - that is, the infrastructure.It may be more efficient to allow only one firm to supply to the market because allowing competition would mean a wasteful duplication of resources.

Legal monopoly or A government-granted monopolyIt is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the sole provider of a commodity; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.For eg.RBI for printing currency.

Private monopoly

A private monopoly is owned and operated by private groups and individuals for purpose of getting maximum profit.

Indian railways:

The Indian Railways (IR), more than 150 years old, is among one of the largest and oldest systems in the world, fondly called by people as the ‘Lifeline of the Nation’. With an extensive network spread across the country, Indian Railways plays a key role in the social and economic development of India. IR is a principal mode of transportation for long haul freight movement in bulk, long distance passenger traffic, and mass rapid transit in suburban area. It occupies a unique position in the socio-economic map of the country and is considered as a vehicle and barometer of growth.

Indian railways (IR) started its 53 km journey between Mumbai and Thane on April 16, 1853 and has went on to become one of the largest Railways in the world. Initially,the railways was managed and operated by several private companies and in 1947, the year of India’s independence, there were forty-two rail systems. As a result, In 1951 the systems were nationalised as one unit, becoming one of the largest networks in the world.

The railway network, of the indian railways traverse through the length and width of the country; the routes cover a total length of 63,940 km (39,230 miles). As of 2005 IR owns a total of 216,717 wagons, 39,936 coaches and 7,339 locomotives and runs a total of 14,244 trains daily, including about 8,002 passenger trains.

Indian Railway’s operations are characterized by mixed traffic –both passenger and freight trains share the same track and infrastructure. Passenger trains constitute nearly 70% of the trains run but contribute to less than 35% of the revenue earned, while freight trains constituting only 30% of the trains, make up 65% of the revenue.

Railways and Monopoly

Indian Railways (IR) is the state-owned railway company of India. Indian Railways has a monopoly on the country’s rail transport. It is one of the largest and busiest rail networks in the world, transporting just over six billion passengers and almost 750 million tonnes of freight annually. IR is the world’s largest

commercial or utility employer, with more than 1.6 million employees. The case of railways in india is an appropriate example of monopoly in india.The railways exhibits all the features of a legal or public monopoly.

Monopoly of the indian railways:

Now we will have a discussion as to how the indian railways exhibits the characters of a monopoly. Indian railways hold monopoly in rail transport in India. Source of their market power can be attributed to following factors

1. Capital Intensive venture, which can be understood from the fact that Indian railways has a separate budget each year. Every year thousands of crore are allotted to the railways. The year 2013 witnessed Rs.63000 crore being invested in railways. The Gross Traffic Receipts of the railways were Rs. 1,43,742 crore in the year 2012 also substantiates the fact that railways is a capital intensive venture.

2. Economies of scale, as Indian railways operate all over India and thus have sufficient operating domain to achieve economies of scale which a new entrant cannot easily replicate

3. Government rules and regulations Need for sanction of the central government for opening up of railways for public carriage of passengers (section 21 of The railways act 1989) has created a rigid barrier to the entry of private players in the market for passenger rail transport.

4. Single sellerThe indian railways is the only unit responsible for providing railway services to whole of the country. Although there may be other mediums of travel like air,road or water but the railway network remains only with indian railways and no other private player can enter in the railway segment.

5. Price discriminationIndian railways has a position, which is not possible in perfectly competitive markets, where it can charge different price to different group of consumers for an identical product, even though the cost of each such saleable unit remains same.Let us discuss about price discrimination in detail.

Price discrimination

Price discrimination exists when the sales of the identical goods or services are transacted at different prices from the same provider. Indian railway enjoys some part of the consumer surplus by employing the different methods of price discrimination.Following are the few factors that enable Indian railways to engage in price discrimination

1. It employs the tactic of market segmentation, and achieves this based on various factors like age, sex, job type etc.

2. The products or services of Indian railways are not resalable and thereby restricts its discount customers to become resellers and benefit from arbitrage.

3. It has monopoly and hence is able to dictate the pricing terms and conditions to a greater extent, in spite of being owned and regulated by Indian government.

1. First degree price discrimination: In first degree price discrimination, price varies by customer's willingness or ability to pay. This type of discrimination aims to extract from each customer whatever he or she is willing to pay and hence theoretically complete consumer surplus is available to the producer. Indian railways do not engage in any first degree price discrimination. However, they plan to do so in near future.

2. Second degree price discrimination: In second degree price discrimination, price varies according to quantity sold. Usually monopolist sets the block prices, under which prices are highest for first block of quantity bought and it is reduced for each successive purchase by the same customer.  Indian railways employ second degree price discrimination as follows

a.    Indian railways charge for every kilometer which is reduced as one travels longer and longer. Thus a train ticket for the Rajdhani’s 1st AC between Bangalore to Delhi (Rs 4555) is lesser than the cost of two 1st AC tickets one from Bangalore to Nagpur (Rs 3245) and Nagpur to Delhi (Rs 2845). The cost differences are negligible if any for providing the same seat on the same train on same day. The price differences are much more than what can be explained by cost, hence this is a case of second degree price discrimination.

Bangalore to DelhiBangalore to Nagpur

Nagpur to Delhi

Rajdhani  1st AC fares 4555 3245 2845

b.    Indian railway provides special passes called ‘Indrail’ for foreign tourists and NRIs holding valid passport. They can obtain reservations against these ‘Indrail’ passes from any reservation office of Indian Railways. Prices of a pass reduce as the consumer increase the number of days of validity of the pass, which simply means customer buys more subsequent days of validity at reduced price. Sample fares for 1st AC for different number of days are as follows

½ day 1 day 2 day 4 day 7 day 15 day 21 day 30 dayAdult 26 43 70 110 135 185 198 248Price/day 52 43 35 27.5 19.28 12.33 9.42 8.27

3.    Third degree price discrimination: In third degree of price discrimination, price usually varies by attributes such as location of purchase, customer segment etc. Indian railways heavily employs third degree of price discrimination in following ways

a.    Indian railways segment its customers by age, thereby segmenting them in different groups. Children older than 5 years however less than 12 years are entitled for a discount of 50% on the purchase price. Citizens equals to or older than 12 years and less than 60 years have to buy the ticket at purchase price. Male citizens equal to or older than 60 years are entitled for a discount of 30% on the purchase price (concession code – ‘SRCTZN’). Female citizens equal to or older than 60 years are entitled for a discount of 50% on the purchase price (concession code – ‘SRCTNW’).  It is to be noted that all these discounts kicks in when the travel distance is more than minimum chargeable distance for the given class.

TrainChild (5-12 years)

Citizen (12 - 60 years)

Senior Citizen (M, F)

Sampark Kranti 1873 3560 2548, 1873

Rajdhani 2330 4555 3220, 2330

Karnataka Express

1806 3427 2455, 1806

                  * All prices for 1ST AC from Bangalore to Delhi obtained from http://www.indianrail.gov.in

b.    Indian railway discounts the price of its tickets for different type of passengers. For example, they offer different concessions to students, patients, sports person, handicapped person, teachers, unemployed youth etc. These discounts make the rail travel attractive to the targeted consumers, who might choose other mode of transport.

Discount Code Description Discount Percent

SPORTN Sports National Level 50%

STDNT Student Concession 50%

TEACHR Teacher 25%

TLSMIU Thalassemia Patient 50%

KIDNEU Kidney Patients 50%

YTH2SR Unemployed Youth for Interview 100%

c.    Indian railway additionally charges a convenience charge ranging from Rs 10 to Rs 20 for all the tickets booked online, thereby discriminating on the location of purchase of ticket. This charge commands premium from the customers who are willing to pay a little extra in exchange of the convenience from booking from home or internet café avoiding queues at railway reservation centers.

d.    Indian railway provides circular journey tickets specially targeted for customer segment intending for sightseeing or pilgrimage trip. Circular Journey Tickets provides consumer the benefit of telescopic rates, which are considerably lower than regular point to point fare. They are issued for all journeys which begin and complete at the same station and can be purchased for all classes of travel.

For instance, let’s see the circular journey fare

Route Circular Journey Fare (1st AC)

New Delhi  - Kanpur Central – Varanasi – Puri – Howrah – Patna – Barauni – Muzaffarpur – Raxual – New Delhi  (4410 Kms)

2458

         Source: http://www.indianrail.gov.in/circular_Journey_Fares.html

Individual leg fare for the same route

Route Train Name Fare (3rd AC)

New Delhi – Kanpur Central Magadh Mail 564

Kanpur Central – Varanasi Shiv Ganga Exp 861

Varanasi – Puri Neelachal Exp 988

Puri – Howrah Puri Hwh Exp 631

Howrah – Patna Poorva Exp 705

Patna – Barauni Mahananda Exp 235

Barauni – Muzaffarpur Vaishali Exp 274

Muzaffarpur – Raxual Mithila Exp 387

Raxual – New Delhi Satyagraha Exp 897

Total fare 5542

4. Inter-temporal price discrimination:  Practice of separating consumers with different demand functions into different groups by charging different prices at different points in time. Indian railway employs this type of discrimination through their Tatkal Seva.

a.    Indian railway additionally levies Tatkal (emergency) charges on passengers for booking on short notice. Tatkal charges have been fixed as a percentage of fare at the rate of 10% of basic fare for second class and 30% of basic fare for all other classes subject to minimum and maximum as given in the table below

Class of Travel Minimum Tatkal Charges Maximum Tatkal Charges

Second (sitting) 10.00 15.00

Sleeper 75.00 150.00

AC Chair Car 75.00 150.00

AC 3 Tier 200.00 300.00

AC 2 Tier 200.00 300.00

                   * Information is obtained from http://www.indianrail.gov.in/tatkal_Scheme.html 

The above examples of price discrimination by the indian railways tells us about its monopoly in the market. In a monopoly, the firm is the price maker and has all the right to change the prices at any given point of time.

Challenges for the Indian railways

Monopoly, besides, is a great enemy to good management.– Adam Smith (1776)

Despite being a monopoly and having exclusive control to operate and manage the railway system of india,the indian railways have emerged as incompetent on various fronts. Being a single provider of rail services,the indian railways was expected to carry out its duties in a responsible manner. But what seems is that the railway authorities are lax and callous in their attitude .

This may be considered as a negative effect of being a monopoly as the firm which has complete control over the market and has no close substitutes can use its dominant power in an abusive manner.

In case of railways, this misuse of power has been rather frequent. The services offered by the railways are of questionable quality. A few instances may include poor passenger amenities, cleanliness, hygiene and poor housekeeping on board trains. Field inspections and audits are seldom conducted, and if at all they are done, no action is taken against the responsible people.

The railway stations lack even basic facilities.  Poor condition of railway tracks, Lack of proper time schedule for the trains, No quality standard for the food in the trains resulting in diseases is a common sight in and around the stations and trains. Besides these, the increasing number of railway accidents, increasing costs, black marketeering of tickets etc. are among the commonest issues concerning the entire rail network.

Even the competition commission of India has held in a case that Indian railways has abused its dominant position in the relevant market and has resorted to unfair trade practices and discrimination. The Comptroller and auditor general of india has also taken the railways to task for its poor quality of services.

The condition of railways remains worrisome in this aspect. However conscious effort from the government can certainly improve the situation. There should be strict norms against any sort of violation of the safety guidelines, lack of responsibility and mismanagement leading to accidents or passenger inconvenience. No political partiality should be entertained in any matter concerning booking tickets or awarding jobs to vendors.

Way ahead

According to the study, all the dimensions of Indian Railways are in poor condition. It has to improve its service quality a lot to achieve passenger’s satisfaction. Analyzed various bottlenecks present in the entire service delivery system.Proper mechanism of maintain time table should be implemented to enhance the punctuality. Railways needs to enhance the conditions of seats in the compartment and need to maintain proper sanitation. Railways needs to work a lot to manage its demand and capacity by proper utilization of their resources. There is a strong need to bring some private player into catering services to enhance the quality of catering. More no. of ticket counters should be built, duration of booking should be increased also. Ticket booking staffs need to work very efficiently and should be given proper training to deal with passengers. Capacity of its existing online booking server should be increased. Proper monitoring of unethical behavior of railway employees should be there.