INDIAN RAILWAYS A PUBLIC SECTOR MONOPOLY

What is a monopoly?

A monopoly is a market structure in which there is only one producer/seller for a product.

Characteristics of monopoly

1.Single Sellers2.No close Substitutes3.Price Maker4.Blocked Entry

A Monopolist is a price maker because he does not face any competitors. Therefore demand is price inelastic.

•A monopolist will seek to maximize profits by setting output where MR = MC •This will be at output Qm and Price Pm.•If the market was competitive the price would be lower and output higher.

Introductionto Indian Railways

Introduced to India in 1853 State-owned railway company of India Largest and busiest rail networks in the world World’s largest commercial or utility employer (more than 1.6 million

employees)

Background 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. A number of railway companies were incorporated between 1855 and 1870.

Most of them operated at a regional level. By the end of 1880, the total track coverage increased to 9000 miles. In 1890, the British Government passed the Railways Act, to govern the

construction and operation of railways in India. By the beginning of the 20th century, there were nearly 25,000 miles of

railway track in the country.

Indian Rialways Zones

Barriers to entry

1. Legal/Government Restrictions

2. High cost of entry

3. Advertising and product differentiation

Price Discrimination

Price discrimination exists when the sales of the identical goods or services are transacted at different prices from the same provider.

Employs the tactic of market segmentation The products or services of Indian railways are not resalable Ability to dictate the pricing terms and conditions Supposed to be financially viable as well as keep in mind common

man's pocket size.

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 Indian railways plan to have online auctions of the freight capacity. This will allow better utilization of freight capacity and boost revenues.

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.

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

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.

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. 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

Advantages of monopoly

Monopoly avoids duplication and hence wastage of resources.

A monopoly enjoys economics of scale as it is the only supplier of product or service in the market. The benefits can be passed on to the consumers.

Monopolies may use price discrimination which benefits the economically weaker sections of the society.

Monopolies can afford to invest in latest technology and machinery in order to be efficient and to avoid competition.

Disadvantages of monopoly

No consumer sovereignty.

Consumers may be charged high prices for low quality of goods and services.

Lack of competition may lead to low quality and out dated goods and services.

Diseconomies of Scale – It is possible that if a monopoly gets too big it may experience diseconomies of scale. – higher average costs because it gets too big

Higher Prices to Suppliers – A monopoly may use its market power and pay lower prices to its suppliers.

FUTURE PROSPECTSRailways to increase revenue through non-fare sources 

Station redevelopment Monetizing land along tracks //Monetizing soft assets Advertising //Overhaul of Parcel business: Railways to liberalize its current parcel policies to increase the non-fare revenue. It will expand its service offerings especially to growing sectors such as e-commerce. Revenues from manufacturing activity Online auctions of the freight capacity

Bibliography

http://en.wikipedia.org/wiki/Monopoly Press Information Bureau, Government of India, Ministry of Railways http://dineshbakshi.com/igcse-gcse-economics/private-firm-as-producer-and-employer/revision-notes/1306-monopoly http://en.wikipedia.org/wiki/Price_discrimination http://www.irctc.co.in/ http://www.indiaonestop.com/railway/dynamicpricingpolicy.htm https://www.boundless.com/marketing/textbooks/boundless-marketing-textbook/pricing-8/pricing-legal-concerns-65/price-discrimination-329-8421/ http://en.wikipedia.org/wiki/Indian_Railways