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Monopoly of Indian Railways

Monopoly of Indian Railways

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Published by Salman S Shaikh

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Published by: Salman S Shaikh on Oct 18, 2012
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Monopoly of Indian Railways : IIM CaseStudy
Written By: Yogin Vora on May 13, 2009 3 Comments  In economics, a monopoly (from the Latin word monopolium
 – 
Greek language monos, one +polein, to sell) is defined as a persistent market situation where there is only one provider of aproduct or service. Monopolies are characterized by a lack of economic competition for the goodor service that they provide and a lack of viable substitute goods.Monopoly should be distinguished from monopsony, in which there is only one buyer of theproduct or service; it should also, strictly, be distinguished from the (similar) phenomenon of acartel. In a monopoly a single firm is the sole provider of a product or service; in a cartel acentralized institution is set up to partially coordinate the actions of several independentproviders (which is a form of oligopoly).
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 soleprovider 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 easilyreplaced (a monopoly on water from a certain spring, sold under a certain brand name, is not atrue monopoly; neither is Coca-Cola, even though it is differentiated from its competition inflavor).
 
Price Maker
In a pure monopoly a single firm controls the total supply of the whole industry and is able toexert a significant degree of control over the price, by changing the quantity supplied (anexample of this would be the situation of Viagra before competing drugs emerged). In subtotalmonopolies (for example diamonds or petroleum at present) a single organization controlsenough of the supply that even if it limits the quantity, or raises prices, the other suppliers will beunable 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-becompetitors from entering the market. Depending upon the form of the monopoly these barrierscan 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 firmsfrom entering the market.
Price setting for unregulated monopolies
 In economics a company is said to have monopoly power if it faces a downward sloping demandcurve (see supply and demand). This is in contrast to a price taker that faces a horizontal demandcurve. A price taker cannot choose the price that they sell at, since if they set it above theequilibrium price, they will sell none, and if they set it below the equilibrium price, they willhave an infinite number of buyers (and be making less money than they could if they sold at theequilibrium price). In contrast, a business with monopoly power can choose the price they wantto sell at. If they set it higher, they sell less. If they set it lower, they sell more.In most real markets with claims, falling demand associated with a price increase is due partly tolosing customers to other sellers and partly to customers who are no longer willing or able to buythe product. In a pure monopoly market, only the latter effect is at work, and so, particularly forinflexible commodities such as medical care, the drop in units sold as prices rise may be muchless dramatic than one might expect.If a monopoly can only set one price it will set it where marginal cost (MC) equals marginalrevenue (MR) as seen on the diagram on the right. This can be seen on a big supply and demanddiagram for many criticism of monopoly. This will be at the quantity Qm; and at the price Pm.This is above the competitive price of Pc and with a smaller quantity than the competitivequantity of Qc. The offensive monopoly gains is the shaded in area labeled profit (note that thisdiagram looks only at the case where there is no fixed cost. If there were a fixed cost, the averagecost curve should be used instead).As long as the price elasticity of demand (in absolute value) for most customers is less than one,it is very advantageous to increase the price: the seller gets more money for less goods. With anincrease of the price, the price elasticity tends to rise, and in the optimum mentioned above it
 
will be above one for most customers. A formula gives the relation between price, marginal costof production and demand elasticity which maximizes a monopoly profit: (known as Lerner
index). The monopolist‟s monopoly power is given by the vertical distance between the point
where the marginal cost curve (MC) intersects with the marginal revenue curve (MR) and thedemand curve. The longer the vertical distance, (the more inelastic the demand curve) the biggerthe monopoly power, and thus larger profits.The economy as a whole loses out when monopoly power is used in this way, since the extraprofit earned by the firm will be smaller than the loss in consumer surplus. This difference isknown as a deadweight loss.
Introduction to Indian Railways
 Indian Railways (IR) is the state-owned railway company of India. Indian Railways had, until
very recently, 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 milliontonne
s of freight annually. IR is the world‟s largest commercial or utility employer, with more
than 1.6 million employees.The railways traverse through the length and width of the country; the routes cover a total lengthof 63,940 km (39,230 miles). As of 2005 IR owns a total of 216,717 wagons, 39,936 coaches and7,339 locomotives and runs a total of 14,244 trains daily, including about 8,002 passenger trains.
Railways were first introduced to India in 1853. By 1947, the year of India‟s independence, there
were forty-two rail systems. In 1951 the systems were nationalised as one unit, becoming one of the largest networks in the world. Indian Railways operates both long distance and suburban railsystems.
Background
 The development of IR had its roots in the 1800s, when India was a British colony. The BritishEast India Company and later, the British colonial governments were credited with starting arailway system in India.The British found it difficult to traverse great distances between different places in India. Theyfelt the need to connect those places with trains to speed up the journey as well as to make itmore comfortable than travel by road in the great heat. They also sought a more efficient meansto transfer raw materials like cotton and wheat from the hinterlands of the country to the portslocated in Bombay, Madras and Calcutta, from where they would be transported to factories inEngland. Besides, the mid-1800s were a period of mutiny and struggle for independence in India,with uprisings in several parts of the country.The British leaders wanted to be able to transfer soldiers quickly to places of unrest. Railwaysseemed to be the ideal solution to all these problems.

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