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:

1)

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:
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 monopolists 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 monopoly
A 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 monopoly

It 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 Indias
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 Railways 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 countrys 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 worlds 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 seller
The 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 discrimination
Indian 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 Rajdhanis 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 Delhi
Rajdhani 1st AC fares

4555

Bangalore to
Nagpur
3245

Nagpur to
Delhi
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

Adult
Price/da
y

day
26

1 day
43

2 day
70

4 day
110

7 day
135

15 day 21 day 30 day

185
198
248

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.

Train

Child
years)

Sampark Kranti

1873

3560

2548, 1873

Rajdhani

2330

4555

3220, 2330

Karnataka
Express

1806

3427

2455, 1806

* All
prices
for
from http://www.indianrail.gov.in

(5-12 Citizen
years)

1ST AC

from

(12

Bangalore

60 Senior Citizen (M,

F)

to

Delhi

obtained

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.

c.

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%

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 caf 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, lets see the circular journey fare
Route

Circular
Journey
(1st AC)

New Delhi - Kanpur Central Varanasi Puri Howrah

Patna Barauni Muzaffarpur Raxual New Delhi
(4410 Kms)

Fare

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 passengers 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.