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Mono rail
- 1. PRESENTED BY LAKHAN S. MEENA K.RAMAN MANISH HAIRAT M.VIJAYA KUMAR -A Case Study of Indian Railways
- 2. What is a monopoly? • A firm is considered a monopoly if . . . –It is the sole seller of its product –Product has no close substitutes
- 3. • Barriers to entry • Legal/Government Restrictions • Advantage of economy of scale • High cost of entry
- 4. • A condition, created by circumstances- not by law • The largest supplier in an industry, often the first supplier in a market, having cost advantage over potential competitors • Fixed costs dominate. Creating economies of scale that are large in relation to size of market • When fixed cost dominates, large customer base is required to achieve profit • Therefore, new entrants are deterred from entering the market
- 10. TOTAL REVENUE ATC AVC MC D=MB MR P QQm’ Pm’ Ppc Qpc Qr Pr TOTAL COST TOTAL PROFIT Min of ATC
- 11. 11 • The Regulator digs deep into the operations of a business and takes some of the firm’s decisions under its own control • Regulators want to achieve economic efficiency, which they do by telling the firm what price it can charge
- 12. 12 Quantity Price D MR AC MC C1 P1 Q1 An unregulated monopoly will maximize profit at Q1 and P1 MC2 P2 Q2 •Regulator will not allow the monopoly to charge P1 , its profit-maximizing price. Unregulated Price •Ideally Regulator would like monopoly to charge P2 , where P2 = AC (break – even point) Regulated Price
- 13. 13 Quantity Price D MR AC MC C1 P1 Q1 P2 Q2 Unregulated Price •Regulator may like monopoly to charge P2 , where P2 = MC, and this would generate a loss to the monopoly, as P2 < AC2 Regulated Price AC2 •The monopoly would need a subsidy in this case equal to (AC2 – P2 )
- 14. 14 • Similarly if regulator wishes to achieve production efficiency (P = minimum AC), here too the monopoly operates at a loss and would need a subsidy
- 15. 15 • The regulator may allow the monopoly firm to charge in between the two extreme cases, and the monopoly firm can increase profits by cutting costs • With price regulation, the monopolist produces more, at a lower price
- 16. 16 Ideally, the monopolist will continue this way until and sells at price = MC to the last group / for the remaining quantity Q1 P1 The first group - Pays P1 Q2 P2 The second group - Pays P2 Quantity Price D Under perfect price discrimination, the monopolist charges a different price to different buyers MC
- 17. 17 • A monopoly may be able to increase its profits further through price discrimination – charging different prices to different categories of buyers
- 18. 18 The profits on the sales to high-price customers are enough to cover the losses on the sales to low-price customers Quantity Price D AC MC Suppose that the Regulator allows the monopoly to charge a price of P1 to some users ( Premium service to premium class) P1 Q1 C1 Other users are offered the lower price of P2 (Basic service such as Second class & Sleeper class travel) P2 Q2 C2
- 19. 19 • Another approach is to allow the monopoly to charge a price above marginal cost that is sufficient to earn a “fair” rate of return on investment
- 21. • In any event, success or failure, government regulation has significant costs: –Collecting information on demand and costs –Creating and staffing bureaucracies to administer and ensure compliance with the regulations –Regulated firms also have huge compliance costs
Editor's Notes
- Compliance costs are often overlooked when assessing the cost of government regulation.