A project on monopolistic market context in nepal
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  • 1. A Project on Monopolistic market context of NepalSubmitted by:Chhitiz ShresthaBBA-BI-B Submitted To: MR. J.P 1. Introduction to Nepalese economy An isolated, agrarian society until the mid-20th century, Nepal entered the modern era in1951 without schools, hospitals, roads, telecommunications, electric power, industry, or civil 1
  • 2. service. The country has, however, made progress toward sustainable economic growth since the1950s and is committed to a program of economic liberalization. Nepal has used a series of five-year plans in an attempt to make progress in economicdevelopment. It completed its ninth economic development plan in 2002; its currency has beenmade convertible, and 17 state enterprises have been privatized. Foreign aid accounts for morethan half of the development budget. Government priorities over the years have been thedevelopment of transportation and communication facilities, agriculture, and industry. Since1975, improved government administration and rural development efforts have been emphasized. Agriculture remains Nepals principal economic activity, employing 80% of thepopulation and providing 37% of GDP. Only about 20% of the total area is cultivable; another33% is forested; most of the rest is mountainous. Rice and wheat are the main food crops. Thelowland Terai region produces an agricultural surplus, part of which supplies the food-deficienthill areas. Economic development in social services and infrastructure has made progress. Acountrywide primary education system is under development, and Tribhuvan University hasseveral campuses. Although eradication efforts continue, malaria had been controlled in thefertile but previously uninhabitable Terai region in the south. Kathmandu is linked to India andnearby hill regions by road and an expanding highway network. The capital was almost out offuel and transport of supplies caused by a crippling general strike in southern Nepal on February17, 2008. Major towns are connected to the capital by telephone and domestic air services. Theexport-oriented carpet and garment industries have grown rapidly in recent years and togethernow account for approximately 70% of merchandise exports. Nepal was at number 92 of 119 countries on Global Hunger Index in 2007, betweenPakistan and India. 2. Monopoly In economics, a monopoly (from Greekmonos (alone or single) + polein (to sell)) existswhen a specific individual or an enterprise has sufficient control over a particular product orservice to determine significantly the terms on which other individuals shall have access to it.Monopolies are thus characterized by a lack of economic competition for the good or service thatthey provide and a lack of viable substitute goods. The verb "monopolize" refers to the processby which a firm gains persistently greater market share than what is expected under perfectcompetition. 3. Monopolistic market structure in context of Nepal Nepal is a developing country. The economy of our country is relatively younger thanthat of western countries. Thus it is in its infancy and developing steadily. It is quite amazing; wehave entered the 21st century, yet majority of our countries income relies on the agriculturesector. Thus the agriculture sector does not have much control over the monopoly market in 2
  • 3. Nepal. The other sectors like manufacturing and service sectors contribute a lot less compared tothe agriculture sector, yet it has a high influence over the monopoly market in Nepal. There is no true monopoly in context of Nepal as well. But there may be a exception inthe case of oil and petroleum products. The sole provider of these products is The Nepal OilCorporation, which in turn depends upon India. Nepals economy is irrevocably tied to India.Nepals geographical position and the scarcity of natural resources used in the production ofindustrial goods meant that its economy was subject to fluctuations resulting from changes in itsrelationship with India. Trade and transit rights affected the movement of goods and increasedtransportation costs, although Nepal also engaged in unrecorded border trade with India. Realeconomic growth averaged 4 percent annually in the 1980s, but the 1989 trade and transit disputewith India adversely affected economic progress, and economic growth declined to only 1.5percent that year as the availability of imported raw materials for export industries was disrupted. From its formation in 1970, Nepal Oil Corporation had an agreement with IOC to buypetroleum products.According to the pact, Nepal Oil Corporation cannot buy from any otherIndian company, while IOC can only sell to Nepal Oil Corporation. IOC has reported a steep decline of 76.45 per cent in net profit at Rs 696.59 crore for thethird quarter. 4. Characteristics of MonopolyThe characteristics of monopolistic market scenario in Nepal include the following points. a. Single Seller In a monopoly there is one seller of the monopolized good who produces all the output.Therefore, the whole market is being served by a single firm, and for practical purposes, the firmis the same as the industry. In case of Nepal, Nepal Oil Corporation is the sole trader ofpetroleum products. b. Market Power Market Power is the ability to affect the terms and conditions of exchange so that the priceof the product is set by the firm (price is not imposed by the market as in perfect competition).Although a monopolys market power is high it is still limited by the demand side of the market.A monopoly faces a negatively sloped demand curve not a perfectly inelastic curve.Consequently, any price increase will result in the loss of some customers. We can again relatethis with the operation of Nepal Oil Corporation in Nepal. We all must have experienced at leastone the effect of lack of petrol. When there is small supply of petrol the vehicles lineup longerthan the road is. Then, like a chain reaction, we have to face lots of traffic jams which delay ourwork. c. Unique Product 3
  • 4. To be the only seller of a product, however, a monopoly must have a unique product.Similarly, Nepal Oil Corporation is the sole provider of petroleum products in Nepal. There is noother substitute for petrol and diesel as well. d. Barriers to Entry and Exit A monopoly is generally assured of being the ONLY firm in a market because of assortedbarriers to entry. Some of the key barriers to entry are: (1) government license or franchise, (2)resource ownership, (3) patents and copyrights, (4) high start-up cost. e. Specialized Information Monopoly is commonly characterized by control of information or production technologynot available to others. This specialized information often comes in the form of legally-established patents, copyrights, or trademarks. While these create legal barriers to entry they alsoindicate that information is not perfectly shared by all. Thus, these are some features of a monopolyfirm like that of the Nepal oil corporation in Nepal.The others firms that have some sort of monopoly inNepal are the Electricity authority and Nepal Tele-communication (NTC).These are not exactlymonopolistic firms. For instance there are new mobileservices like Ncell (recently converted from MeroMobile), Spice, Sky, etc. Yet people still prefer NTCdue to lower costs. The figure beside gives the generalpicture of how monopoly markets like the Nepal OilCorporation or even NTC operates. 5. Monopolistic competition in Nepal Monopolistic competition is a form of imperfect competition where many competingproducers sell products that are differentiated from one another (that is, the products aresubstitutes, but, with differences such as branding, are not exactly alike). In monopolisticcompetition firms can behave like monopolies in the short-run, including using market power togenerate profit. In the long-run, other firms enter the market and the benefits of differentiationdecrease with competition; the market becomes more like perfect competition where firmscannot gain economic profit. Unlike perfect competition, the firm maintains spare capacity.Models of monopolistic competition are often used to model industries. Textbook examples ofindustries with market structures similar to monopolistic competition include restaurants, cereal,clothing, shoes, and service industries in large cities.Monopolistically competitive markets have the following characteristics: 4
  • 5. There are many producers and many consumers in a given market, and no business has total control over the market price. Consumers perceive that there are non-price differences among the competitors products. There are few barriers to entry and exit. Producers have a degree of control over price. In the context of Nepal Nokia, Samsung,Sonyericsson, etc. are good examples but thereare better examples. Toothpaste and toilet paper manufacturers often engage in monopolisticcompetition practices. Rather than change the products themselves, producers change thepackaging, thedesign, or simply claim through advertising that their product is best. The restaurant industry is another example of monopolistic competition, especially in thefast food industry in which all services are basically the same, but are marketed differently, andthere exists a perception that some fast food restaurants must be better than others. 6. Short-run Relevance The analysis of short-run production by amonopolistically competitive firm provides insight intomarket supply. The key assumption is that amonopolistically competitive firm, like any other firm,is motivated by profit maximization. The firm choosesto produce the quantity of output that generates thehighest possible level of profit, given price, marketdemand, cost conditions, production technology, etc. The short-run production decision formonopolistic competition can be illustrated using theexhibit to the right. The top panel indicates the twosides of the profit decision--revenue and cost. Theslightly curved green line is total revenue. Becauseprice depends on quantity, the total revenue curve is not a straight line. The curved red line istotal cost. The difference between total revenue and total cost is profit, which is illustrated in thelower panel as the brown line. 5
  • 6. A firm maximizes profit by selecting the quantity of output that generates the greatest gapbetween the total revenue line and the total cost line in the upper panel, or at the peak of theprofit curve in the lower panel. In this example, the profit maximizing output quantity is 6. Anyother level of production generates less profit. 7. Long-run Relevance In monopolistic competition, when one firm or product variety is profitable, it will attractmore competition -- more substitutes and closer substitutes for the profitable product type. Thus,demand will shift downward and (perhaps) costs will increase. This will go on as long as the firmand its product type remain profitable. A new "long run equilibrium" is reached when(economic) profits have been eliminated. This is shown in Figure 2: In this example, the firm can break even by selling 935 units of output at a price of $76per unit. The profit -- zero -- is the greatest profit the firm can make, so profit is beingmaximized (as usual) with the output that makes MC=MR. Zero (economic) profit is also the condition for long run equilibrium in a p-competitiveindustry. But this equilibrium is not the ideal that the long run equilibrium in a p-competitiveindustry is. Many economists feel that the long run equilibrium in a monopolistic industry hassome problems:Inefficiency Notice that, either in the long run or in the short, the price is greater than marginal cost.But the condition for efficient production is that price is equal to marginal cost. Thus, anindividualfirms output is less that would be efficient, according to the traditional standard.Firm’s output is less that would be efficient, according to the traditional standard.Excess capacity 6
  • 7. We see that, in the long run, the firm is not producing at the bottom of its long runaverage cost curve. Instead, it is operating on a scale that is smaller and less efficient -- the firmhas a capacity to produce more at a lower average cost. To put it a little differently, each firm isserving a market that is too small, and there are too many firms, so that the product group as awhole has the capacity to serve more customers than there are -- excess capacities.Advertising and non-price competition A firm in a p-competitive industry will not advertise at all. Why should they? The p-competitive firm can sell all it wants to sell, without cutting its price, so why spend money to getmore customers? But the monopolistically competitive firm cannot sell all it wants withoutcutting its price, and advertising to get more customers may be more profitable than cuttingprice. Thus, economists expect to see monopolistic competition associated with advertising.Moreover, advertising seems to go along with differentiated products, and as a profitable firmattracts more competition, with more substitutes and closer substitutes for their product, the firmmay feel that it needs to spend more on advertising. (Thats why the cost curve could be higher ina long run equilibrium). In this context, advertising is seen as wasteful. Of course, all of this is controversial. Some economists have been quite critical of theidea of monopolistic competition from the start. Here are some responses the critics might maketo these points.Inefficiency While the hypothetical monopolistically competitive firm does operate inefficiently, itdoesnt miss efficiency by much. The deviation of marginal cost from marginal price, and of thefirms production and price from the efficient, p-competitive quantities could be only a fewpercent -- less than we can detect in practice. Thus, despite the differentiation of products, the p-competitive theory may be a "good enough" approximation, especially in the long run.Excess capacity Again, for concreteness, lets think of hairdressing as a typical instance of "monopolisticcompetition." What this is telling us is that if some of the existing hairdressing enterprises werecombined, so that there would be fewer hairdressers each serving a larger market, they couldserve that market at a lower cost and price. Perhaps; but some consumers would lose out, sincethey would have to go further from their homes or offices to find the nearest hairdresser. Moregenerally, getting rid of "excess capacity" means sacrificing variety -- and thats a loss. Whosefavorite is to be eliminated?Advertising and non-price competition 7
  • 8. Actually, advertising is common in most industries, however, competitive -- as adisequilibrium event. When price is a little above equilibrium, it makes sense for a competitivefirm to include advertising it its competitive mix; but when price competition brings the pricedown to its equilibrium level, sellers no longer have any reason to compete for buyers -- eitherby price cuts or advertising or any other way. In the real world, a competitive industry is alwaysreacting to changing events, always moving toward the equilibrium -- but it may never stay therefor very long. And this advertising is useful, in keeping consumers up to date about theiropportunities. So it is not clear that monopolistically competitive advertising is something to beconcerned about 8. Industries in Nepal During the 1950s and 1960s, Kathmandu received aid commitments from Moscow andBeijing. During the 1960s, Soviet and Chinese aid also supported development of a fewgovernment-owned industries. Most of the industries established used agricultural products suchas jute, sugar, and tea as raw materials. Other industries were dependent on various inputsimported from other countries, mainly India. As a result of the 1989-90 trade dispute with India, many inputs were unavailable,causing lower capacity utilization in some industries. During the same period, Nepal also lostIndia as its traditional market for certain goods. Because of the lack of industrial materials, suchas coal, furnace oil, machinery, and spare parts, there was a considerable adverse impact onindustrial production. Industry accounted for less than 20 percent of total GDP in the 1980s. Relatively small byinternational standards, most of the industries established in the 1950s and 1960s were developedwith government protection. Traditional cottage industries, including basket-weaving as well ascotton fabric and edible oil production, comprised approximately 60 percent of industrial output;there also were efforts to develop cottage industries to produce furniture, soap, and textiles. Theremainder of industrial output came from modern industries, such as jute mills, cigarettefactories, and cement plants. a. Manufacturing Among the modern industries were large manufacturing plants,including many public sector operations. The major manufacturingindustries produced jute, sugar, cigarettes, beer, matches, shoes,chemicals, cement, and bricks. The garment and carpet industries, targeted at export production,have grown rapidly since the mid1980s whereas jute production has declined. Industrial estateswere located in Patan (also called Lalitpur), Balaju, Hetauda, Pokhara, Dharan, Butawal, andNepalganj. The government provided the land and buildings for the industrial estates, but theindustries themselves were mostly privately owned. 8
  • 9. The 1986-87 Nepal Standard Industrial Classification counted 2,054 manufacturingestablishments of 10 or more persons from 51 major industry groups, employing about 125,000workers. That same year the total output from these industries amounted to about Rs10 billion;value added was estimated at almost Rs3.6 billion. It was nearly Rs5.1 billion in FY 1989. ByFY 1989, there were 2,334 such establishments recorded, employing about 141,000 persons. b. Private Industry The history of incorporated private firms in Nepal is short. TheNepal Companies Act of 1936 provided for the incorporation ofindustrial enterprises on joint stock principle with limited liability.The first such firm, Biratnagar Jute Mills, was a collaborative ventureof Indian and Nepalese entrepreneurs. It was formed in 1936 withinitial capital of 160,000 Indian rupees. In response to shortages of some consumer goods during World War II (1939-45),fourteen private companies emerged in such diverse fields as mining, electrical generation, andpaper and soap production. The initial capital invested in each of these industries was small. In1942 two paper mills emerged as joint ventures of Nepalese and Indian entrepreneurs. Industrialgrowth gained momentum after 1945, although the end of World War II had reduced the scarcityof goods and caused many of these companies to incur losses. Under the Nepal Companies Act, there was no provision for private limited companies.In 1951, however, a new act was implemented with provisions for private limited companies.This act encouraged the establishment of ninety-two new private joint stock companies between1952 and 1964. Most of these companies were much smaller than existing companies. Under theprovisions of the 1951 act, public disclosure of the activities of the firms was not required,whereas the 1936 act allowed substantial government intervention. The Industrial EnterprisesAct of 1974 and its frequent amendments shifted the governments emphasis on growth from thepublic to the private sector. However, discrepancies between policy and practice were evident,and the public sector continued to be favored. c. Public Companies Public companies also had varied success. Between 1936and 1939, twenty public companies were formed, of which threefailed. Between 1945 and 1951, thirty-five public firms wereincorporated, six of which went out of business. Between 1936and 1963, fifty-four firms were incorporated, but at the end of1963 only thirty-four remained in operation. The success ofpublic companies continued to be erratic. d. Minerals Because only a few minerals were available in small quantities for commercialutilization, the mineral industrys contribution to the economy was small. Most mineral 9
  • 10. commodities were used for domestic construction. The principal mineral agency was theDepartment of Mines and Geology. Geological surveys conducted in the past had indicated thepossibility of major metallic and industrial mineral deposits, but a poor infrastructure and lack ofa skilled work force inhibited further development of the mineral industry. The most important mineral resources exploited were limestone for cement, clay, garnet,magnetite, and talc. Crude magnetite production declined from a high of approximately 63,200tons in 1986 to approximately 28,000 tons in 1989; it was projected to decline further to 25,000tons in 1990.In 1990 mineral production decreased significantly, largely because of political unrest.Production of cement fell approximately 51 percent over 1989--from approximately 218,000 tonsto about 107,200 tons. Production of clays for cement manufacture dropped from 7,206 tons to824 tons. Lignite production decreased 19 percent, and talc production fell 73 percent.Ornamental marble production, however, increased in 1989--by 100 percent in cut marble and1,560 percent in marble chips.Nonetheless, the mining industry had the potential to become a more important part of theeconomy, as new mines were being planned or were being developed. Two cement plantsalready were in operation, and a third one was being planned. It was expected that with fullproduction in the three plants, Nepal might become self-sufficient in cement. A magnetite mineand pressuring plant east of Kathmandu had completed its construction phase and beganproduction of chalk powder (talcum powder) on a trial basis in 1990. A high-grade lead and zincmine was being developed north of Kathmandu in the region of Ganesh Himal and was expectedto become operational in the 1990s, although raising enough capital for the project wasproblematic. Production of agricultural lime in 1989 doubled that of the previous year,suggesting that progress was being made towards meeting requirements of the agriculturalsector. e. Tourism Tourism was a major source of foreign exchange earnings. Especially since MountEverest (Sagarmatha in Nepali) was first climbed by Sir Edmund Hillary and Tensing Sherpa in1953, the Himalayas have attracted foreigners to Nepal. Mountaineering and hiking were ofconsiderable interest as were rafting, canoeing, and hang gliding. Tourism was facilitated withthe opening of airways to Kathmandu and other parts of the country and the easing of travelrestrictions. In the 1950s, there was a shortage of hotels. Beginning in the 1960s, the governmentencouraged the building of hotels and other tourist facilities through loans. According togovernment statistics, between 1985 and 1988 the number of hotel rooms increased from under22,000 to more than 27,000. Prior to the trade impasse with India beginning in March 1989, tourism had grown bymore than 10 percent per year for most of the 1980s. Between 1985 and 1988, the number of 10
  • 11. tourists increased from approximately 181,000 to about 266,000. More than 80 percent of thetourists arrived in the country by air. In FY 1985, more than US$40 million worth of foreign exchange was earned throughtourism. By FY 1988, this amount had increased to more than US$64 million. In FY 1989,tourism accounted for more than 3.5 percent of GDP and about 25 percent of total foreignexchange earnings. The 1989 trade and transit impasse with India negatively affected tourismbecause the transport and service sectors of the economy lacked supplies. Beginning in FY 1990,however, Kathmandu initiated a policy to allocate fuel on a priority basis to tour operators andhotels. 11
  • 12. References: www.google.com www.wikipedia.com www.answers.com www.economics-help.com Library books Online journals 12