PRESENTED BYLAKHAN S. MEENA
K.RAMANMANISH HAIRATM.VIJAYA KUMAR
-A Case Study of Indian Railways
Need for Regulati on
of a Natural Monopoly
What is a monopoly?• A firm is considered a monopoly if . . .–It is the sole seller of its product–Product has no close substitutes
Monopoly - Introducti on
• Barriers to entry• Legal/Government Restrictions• Advantage of economy of scale• High cost of entry
Why do Monopolies Arise?
• 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
Natural Monopoly
ATC
AVC
MC
D=MB
MR
Q
P
Pm
Qm
Ppc
Qpc
Monopoly
MR=MC
MC=MB
ATCAVC
MC
D=MB
MR
Q
P
Pm
Qm
Ppc
Qpc
Total Revenue
Total Profit
Total Cost
Monopoly
ATCAVC
MC
D=MB
MR
Q
P
Pm
Qm
Ppc
Qpc
Monopoly
ATC
AVC
MC
D=MB
MR
Ppass
Qpass
Pm
P
Q
TOTAL REVENUETOTAL COST
TOTAL LOSS
IR-Passenger Service
P<AVC
ATC
AVC
MC
D=MB
MR
P
QQm’
Pm’
Ppc
Qpc
TOTAL REVENUETOTAL COST
TOTAL PROFIT
IR-Freight ServicePm’<Pm
TOTAL REVENUE
ATC
AVC
MC
D=MB
MR
P
QQm’
Pm’
Ppc
QpcQr
Pr
TOTAL COST
TOTAL PROFIT
IR-Aft er Regulati onMin of
ATC
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
Regulati on of Natural Monopoly
12
Quantity
Price
D
MRAC
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
Regulati on of Monopoly – Opti on 1
13
Quantity
Price
D
MRAC
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 )
Regulati on of Monopoly – Opti on 2
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
Regulati on of Monopoly
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
Regulati on of Monopoly
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
Price Discriminati on
17
• A monopoly may be able to increase its profits further through price discrimination – charging different prices to different categories of buyers
Price Discriminati on
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
ACMC
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
Regulati on of Monopoly- Opti on 3
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
Regulati on of Monopoly- Opti on 4
Consumer Surplus is Increased by Regulati on
• 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
Costs of Regulati on
Thank You
Top Related