Indian Railway
Case study -1
Indian Railways is the state-owned railway company of India having more than 64000 Kilometers of track and 6909 stations. It has the world’s 4th largest railway network after that of United States, Russia and China. It carries over 20 million passengers and 2 million tons of freight daily. It is one of the world’s largest commercial employers with more than 1.6 million employees. It owns over 200000 freight wagons, 50000 coaches and 8000 locomotives. 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 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 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. The report will discuss how Indian Railways uses its monopolistic position in Indian Rail transport industry to engage in policy of price discrimination.
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. Types of price discrimination 1. First degree price discrimination: In first degree price discrimination, price varies by customers 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. 2. Second degree price discrimination: In second degree price discrimination, price varies according to quantity sold. Us hlnek nrirec under which nrirec are hinhest kw first hinrk of niiantitv hniinht and it is reduced kw each successive mire
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. Types of price discrimination 1. First degree price discrimination: In first degree price discrimination, price varies by customers 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. 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 Rajdhani’s 1st AC between Bangalore to Delhi (Rs 4555) is lesser than the cost of two 1stAC 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.
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.
Question -1 With reference to the case, appraise the monopoly features of the Indian railways and suggest how the Indian railway market might differ if this had been a (monopolistic) competitive environment. (7 marks)
Case study: 2
The US automobile industry is a good example of an oligopoly. It consists mainly of three major firms, General Motors (GM), and Ford and Chryslers, The influence of this oligopoly can be seen in the prices and the development and introduction of new car models into the American car market. Extensive work has been done on the field of collusive behavior in the US automobile market and moreover the introduction of the small car in the 1950s shows how the firms collude when it comes to the introduction of a new car. The oligopoly in the American automobile industry is collusive, because of that, it will after that be pointed out how price cheaters are punished in that cartel. The Price Leader in the Oligopoly In the oligopoly of the American automobile industry a vivid dynamic between price leaders and price followers can be found. Here the example of the pricing decisions between 1965 and 1971 shows strong evidence that General Motors is the price leader in this oligopoly (Boyle & Hogarty, 1975). In this time span Chrysler always announced its price increases first, after that General Motors announced a price increase which was smaller than Chrysler’s. General Motors’ move then led to Chrysler reducing its own price to be roughly the same as General Motors’ (Boyle & Hogarty, 1975). Boyle and Hogarty (1975) do not mention explicitly how Ford behaved in that pricing arrangement but it can be assumed that Ford is a price follower who in the end copies General Motors’ chosen price. How Prices are determined It is clear that there is a difference between how prices are chosen in perfect competition markets and the oligopolistic market. In perfect competitions the market participants can maximize their profit by producing the quantity where the marginal costs of producing a unit is equal to the market price which itself is equal to the marginal revenue. This yields to the fact that the market is efficient and competitive because the market participant just charges the price where economic profit is zero. In contrast to that, the collusive companies of General Motors, Ford, and Chrysler are trying to avoid this competitiveness in the market by pricing jointly (Bresnahan, 1987). The oligopolists act like a single monopolist when it comes to pricing decisions and want to maximize the joint profit instead of the firm’s single profit (Bresnahan, 1987). This pricing decision leads to the result that the collusive price is way above the marginal costs at this quantity, so maximizing the profit of the single companies to be as the maximized profit in the perfect competitive market (Bresnahan, 1987). Influences on the Surpluses and Welfare This collusive price setting behavior leads, as usual in oligopolies or in this specific case of oligopolists acting like one single monopolist, to a loss in total welfare and in the consumer surplus. At the same time there is an increase in producer surplus because the price in the collusive oligopoly acts like a mark-up on the price-quantity equation of equalizing marginal costs with marginal revenues. In figures, the collusive price generates a produce surplus of $4billion in each year, while the loss of the consumers is $7billion in each year (Bresnahan, 1981). The total loss in welfare is over $3billion in each year (Bresnahan, 1981). This figures show that there is a big loss in market efficiency after the introduction of the collusive price by the oligopolists. The General Motors introduced zero interest financing or price rebates in the sale of its automobiles. Ford and other car manufacturers also followed suit and started offering attractive schemes to consolidate their position. Usually the oligopolists avoid price cutting methods to compete since it can lead to ruinous price wars and will mean losses for everyone. Therefore, advertising other sales promotional measures and product differentiation are the methods used to capture new markets. If G.M. Motors launches a major advertising campaign, Ford and Chrysler will surely be forced to react to this and do something to promote their products
Question 2 With reference to the case, explain the oligopolistic features of the car market and draw the diagram for oligopolistic market structure (4Marks) Discuss the conditions within an oligopolistic market structure make it possible for dominant firms to collude? Is collusion “cheat-proof’? (4Marks)
