Natural monopoly Essay Example for Free

born(p) monopoly EssayThis traverse studies what argon the various sources of monopoly and real animation examples for each source. It analyses how each of these businesses grew into a monopoly and substantiates the psychoanalysis with actual facts figures (wherever available). Methodology of study The subject has been divided into sub-topics based on the source out of which the monopoly arises. The report begins with the introductory analysis of the monopoly functioning. Each source has then been studied with reference to one real life example followed by the conclusion. What defines a Monopoly Its CharacteristicsProfit Maximizer, Price Maker, High Barriers to Entry, Single seller, Price Discrimination study sources of monopolies 1. Ownership of strategic resources A monopoly is likely to arise if a firm has complete bear all over a key input or resource used in production. Famous example is ball field trade monopoly firm De Beers. 2. Government regulations A governm ent- assignmented monopoly (also called a de jure monopoly) is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or company to be the mend provider of a commodity.Potential competitors be excluded from the mart by law, regulation, or new(prenominal) mechanisms of government enforcement. 3. unpatterneds Patents grant the inventor the exclusive right to produce a product for 20 historic period (new introductionwide observable period open with a 1995 GATT agreement). By granting the right to produce a new product without veneration of competition, patents provide incentive for companies or individuals to continue developing innovative new products or services. For example pharmaceutic companies spend large sums on research and development and patents atomic number 18 essential to earning a profit.4. Natural monopoly A natural monopoly is a company that experiences increasing returns to scale over the relevant site of output and comparatively high fixed costs. A natural monopoly occurs where the average cost of production declines finishedout the relevant range of product demand. When this situation occurs, it is always cheaper for one large company to add on the market than multiple smaller companies. An early market entrant that takes advantage of the cost structure and provoke expand rapidly can exclude smaller companies from entering and can drive or buy out other companies.Monopoly through ownership of key resource De Beers Diamonds are one of the worlds, and specifically Africas, major natural resources. An estimated US$13 billion worth of rough diamonds are produced per twelvemonth, of which approximately US$8. 5 billion are from Africa (approximately 65%). Global diamond jewellery gross revenue continue to grow, increasing three-fold in the past 25 years, and are currently worth in excess of US$72 billion every year. Chronology over which DeBeers has get under ones skin one of the worlds most formerful monopolies1.Ownership of all South African diamond mines Smaller groups needing common infrastructure form diggers committees and small claim holders wanting to a greater extent land melt into large claimholders to form larger ones. In no time, it could establish De Beers consolidated mines. 2. Supply and Demand control The Diamond Trading Company has been formed. The mantra is Create a scarcity of diamonds and high footings will follow. And while other commodities corroborate seen set fluctuations over the years, diamonds hurts have climbed since the Great Depression mostly.Demand has also been consistently untroubled over the years irrespective of economic scenario. pic pic 3. Business model De Beers and its Central Selling Organization established exclusive contracts with suppliers and buyers, making it impossible to deal with diamonds outside of De Beers. The structure remained the same for much of the 20th one C A De Beers subsidiary would buy the diamon ds. De Beers would determine the amount of diamonds they wanted to sell, and at what expense, for the whole year.How the monopoly functions Sends invitations to 250 chosen clients to view the 10 annual sights client receives a small box uncut diamonds price of the box ($1-$25 million) client can only buy the whole box and he cannot resell it in a rough form. Thus, De Beers decides How many diamonds of each quality will be distri yeted in total. How this supply will be divided among the clients and the Price of diamonds. 5. The creation of Debswana A joint venture between the company and the nation of Botswana meant a significant shareholding claim in De Beers by the African country.6. Marketing campaigns Coined world famous marketing campaign, A diamond is forever 7. Antitrust laws of US and conflict with various governments During its initial years, it controlled over 90% of worlds diamond production but over time, it has lost its monopoly to various controversies and oppositions from countries with great stockpiles. pic Source CNN capital Report 8. Statistical graphs showing how De Beers fared over years in its sales, production and profitability pic Source De Beers assembly Website pic pic Source Rapaport Trade Report pic.Above graph indicates how competitors have dampened the monopoly of DeBeers over the years. Like ALROSA, De Beers needs to be assured of a sustainable level of demand for its goods. Monopoly through govt. have strategic resources Coal India trammel CIL is the worlds largest burn mining company two in terms of proven char reserves and coal production. It is entirely owned by the union government, under the administrative control of the Ministry of Coal. It is regard in coal mining and production and contributes around 81. 1 per cent of Indias coal production. It produced around 431.32 million hemorrhoid of raw coal in fiscal 2011. CIL currently operates eight subsidiaries, of which, seven are mixed in coal production while the eighth is Central Mine Planning and Design Institute (CMPDI) which is involved in mine planning and other consultancy services related to mining. The seven coal-producing subsidiaries of CIL east Coalfields Ltd (ECL) ,Bharat Coking Coal Ltd (BCCL),Central Coalfields Ltd (CCL),Northern Coalfields Ltd (NCL),Western Coalfields Ltd (WCL),South Eastern Coalfields Ltd (SECL),Mahanadi Coalfields Ltd (MCL)pic Outlook on demand, supply, and imports of non-coking coal and cooking coal in India over the adjacent five yearsCRISIL Research expects the total demand for non-coking coal to grow at 10 per cent CAGR over the next 5 years (2012-13 to 2016-17). Production of non-coking coal is expected to rise only at a CAGR of 7 per cent from 2012-13 to 2016-17. Consequently, imports are set to increase to 196 million tonnes by 2016-17 from 83 million tonnes in 2011-12. process in steel production through the b travel furnace route and pig iron production are expected to increase coking coal demand , to 68 million tonnes in 2016-17 from 38 million tonnes in 2011-12 ascent at 12. 4 per cent CAGR over the next five years.On the other hand, coking coal production is expected to rise to 60 million tonnes in 2016-17 at a CAGR of only 6. 6 per cent. CIL further domestic coal prices in February 2011 Coal India Limited (CIL) has increased the prices of antithetical grades of coking and non-coking coal with effect from February 28, 2011. For the initiative time in its history, CIL adopted a differential pricing approach by increasing the prices of coal for industrial end-use sectors such as steel, cement, paper, and aluminum, while effecting only a marginal increase in the prices of coal for deemed essential services such as power utility, fertilisers, and defense sectors.This differential pricing is intended to become the prices of coal consumed by non-priority sectors in line with the international coal prices. Cement and sponge iron players to be affected. The Economic Survey ha s said that Coal India Ltds (CIL) near monopolistic position has also led to supply bottlenecks. Calling for infusing competition in the domestic coal sector, out-of-pocket to the CILs dominance there have been delays in development of new coal fields and inadequate emphasis on cost reductions at operational levels. picFederation of Indian Chambers of Commerce and Industry (FICCI) said the Government should take go to end the monopoly of Coal India and allow private players in coal mining. As regards coal, today our imports are 15 per cent. By the end of the 12th plan, imports are going to be 28 per cent, he said, adding currently power plants with 22,000 MW capacities are suffering due to lack of availability of coal. What can be done to reduce monopoly of CIL India 1. The cranny between demand for coal and domestic availability is widening at a faster pace. on that point is perhaps need to introduce competition in this sector India must bring in more private miners to develop coal reserves which majority state-owned Coal India Ltd has left untapped.. It will push up the cost of power generation and the resultant pressure on the regulated tariffs in the power sector. Therefore, both the factors should be considered. 2. Coal pricing is also a major issue. It has to be transparent, flexible and based on global norms. Monopoly through the Patent way In the highly competitive pharmaceuticals sector where development programmes last for years and have budgets ranging into six-figure sums, maintaining a monopoly position for an important do medicates is key to commercial success. Only by securing a monopoly can a company justify the very significant investment of time and sustenance into the pre-clinical and clinical development necessary to support the stringent requirements for grant of a marketing authorization. The mechanisms for achieving this embroil Patent protection Supplementary protection certificate Data exclusivity Orphan drug status.The Eu ropean framework for pharmaceutical regulation and authorization attempts to protect the investment of companies in their innovations by providing periods of so-called data exclusivity. The Food and medicine Administration can also protect the companys exclusive access to the market, independent of the patents. such(prenominal) exclusivity prevents FDA approval for a competing drug for up to seven years, depending on the type of drug. In addition to the market exclusivity and patents, drug companies already receive incentives to develop so-called orphan drugs used to treat rare diseases.These incentives include FDA research grants, tax credits for up to 50 percent of the cost of clinical research and a waiver of FDA fees. Fewer drug companies competing in a therapeutic break up leads to fewer prescription drugs being developed within that class and allows the companies to use their patents and market exclusivity to further increase prices. Effect on price of the Drug before and a fter Patent expiry The following(a) graph shows the effect on price of the drug when the patent gets expired and more and more generic manufacturers enter into the marketplace.Initially the price of the drug is very high but as patent gets expired and more manufacturers comes in the price of the drug fallspic Effect on revenues earned by company before and after patent expiry The following graph depicts the effect of the revenues due to patent. Initially the revenues earned are in negative because of huge initial investment that is required for the launch. The next few years the revenues earned increases every year till the year when the patent gets expired and more players enter into the market and the revenue earned by the company goes down. pic.The side of Zyprexa Zyprexa (olanzapine), an antipsychotic for the treatment of schizophrenia and bipolar disorder is an atypical antipsychotic medication by Eli Lilly. The patent of which got expired in October 2011, generated more tha n 20 percent of the companys total revenue in the year-ago quarter. With new generics now competing in the market, revenue from the drug slid 44 percent to $749. 6 million from $1. 34 billion pic The case of Ambien (Zolpidem by Sanofi aventis) The first drug to compete with Ambien was Sonata (active ingredient Zaleplon) introduced to market in 1999, but did little to compete with Ambien.In fact, it did not even make the list of top 200 exchange drugs from 2003-2007. By that time Ambien had already captured most of the United States insomnia market. Ambien and Sonata held the market until 2005 when Lunesta (active ingredient eszopiclone) was approved. Lunestas popularity steadily grew and sales remain around $900 million. All three drugs are structurally similar, and act on the same class of receptors. The sales of Ambien continued to stay strong until its patent expired in 2007. Shortly after, 13 generic drugs manufactures got approval to manufacture Zolpidem and the sales of Ambie nfell from about 2 billion to less than 1 billion. pic sum yearly sales of Ambien and Lunesta. A case of Natural Monopoly Indian railroad tracks At the centre, there is a center Minister of lines, under whom there are two Minister of State for Railways. At the national level, the Railway Board is responsible for formulation of policies and effective operation of railways. Operating ratio was 91. 1 percent in 2010-11, improved to 95. 0 percent in 2011-12. How it became a monopoly IR is a classic example of a public monopoly.Historically, this monopoly was a necessity since construction of railway infrastructure required large resources, investment involved long gestation periods and returns were uncertain. Capital Intensive venture, which can be understood from the fact that Indian railways has a separate budget each year 1. 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 ca nnot good replicate 2. Government rules and regulations Factors that enabled railways to engage in price disagreement using up part of consumer bare(a)1. The products or services of Indian railways are not resalable and thereby restricts its discount customers to become resellers and benefit from arbitrage. 2. It has monopoly and and then is able to dictate the pricing terms and conditions to a greater extent, in spite of being owned and regulated by Indian government. Degrees of price discrimination, the tools that express monopolists power and capacity of price making Second degree price discrimination 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.Indian railways charge for every klick which is reduced as one travels longer and longer. Thus a train ticket for the Rajdhanis first AC between Bangalore to Delhi (Rs 4555) is lesser than the cost of two 1st AC tickets one f rom 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 molybdenum degree price discrimination. Bangalore to Delhi Bangalore to Nagpur Nagpur to Delhi Rajdhani 1st AC fares 4555 3245 2845 .* Source www. irctc. co. in Third degree price discrimination Here, price usually varies by attributes such as location of purchase, customer segment etc. Indian railways heavily employs third degree of price discrimination as below Train Child (5-12 years) Citizen (12 60 years) Senior Citizen (M, F) Sampark Kranti 1873 3560 2548, 1873 Rajdhani 2330 4555 3220, 2330 Karnataka Express 1806 3427 2455, 1806 Discount Code Description Discount Percent SPORTN Sports National Level 50% STDNT Student Concession 50% TEACHR Teacher 25% TLSMIU Thalassemia Patient 50%. KIDNEU Kidney Patients 50% YTH2SR jobless Youth for Interview 100% * Source www. irctc. co. in Statistical data showing the indispensable monopoly of Indian railways pic picpic Conclusion Whilst we want to be in a perfect competition, sometimes it isnt possible due to multiple constraints. Sometimes, it is also useful especially when it comes to cost efficiency in terms of natural monopolies. And then there are cases of strangle holding system to exert monopoly like De Beers. All these play different roles under different situations.Going by the examples we discussed, there may not be complete monopoly due to inherent monopolys inefficiencies and a constant push to improve market equilibrium for the social welfare of the society. References 1. Unvieling the diamond industry 2011 report Bain and Company 2. www. diamondcouncil. org 3. http//www. businessinsider. com/history-of-de-beers-2011-12? op=1ixzz25KFAEdXk 4.Crisil Research Report Coal India Limited 5. Railway Budget Highlights 2011-2012, Govt. of India report. 6. www. irctc. co. in 7. Indian Pharmacy Society Report 8. Sanofi Aventis Annual Report.