Existence of Monopoly
in India
By:
Amit Singh
MBA(2010-2012)
Monopoly Market of Nestlé’s Maggi in India
In the early 1990s the entry of many multinationals into the country
triggered the debate of the long term view of many companies which
were willing to take in a developing economy.
The often quoted example use to be that of Kellogg's Corn Flakes and
how the company had a 30 year plan wherein they were willing to invest
in changing the eating habits of Indians.
One company which has achieved a reasonable success in introducing a
more or less alien food and succeeding is that of Maggi Noodles. Maggi
noodle is a brand of instant noodles manufactured by Nestlé.
The brand is popular in Australia, India, South Africa, Brazil, Nepal,
New Zealand, Malaysia, Singapore, Sri Lanka, Bangladesh, Pakistan, and
the Philippines. In several countries, it is also known as "maggi mee"
(mee is Indonesian/Malay for noodles). Maggi noodles are part of
the Maggi family, a Nestlé brand of instant soups, stocks, and noodles.
To check out the success of the brand check out the following it has
among the Kids, there is even an orkut & facebook community on Maggi
Lovers.
It is a far cry from the initial launch days when Maggi was distributed
free in schools to promote trial; I am talking about 1980s during the
launch period. The company made an attempt in the mid-90s to change
the formulation of the product, which was outright rejected by the
consumers and the company had to go back to it old formulation and
the company had to do a massive communication campaign.
Today India is the largest market for Maggi Noodles. But the brand
has turned profitable just recently, so it has been a long haul for the
company in the Indian market.
Maggi noodles recently introduced a new variety of its noodles, to
cater for the health conscious like 'No MSG, Less Salt, and No Trans
fat. A whole-wheat flour based noodle variation marketed by the name
"Vegetable Atta Noodles" has been introduced in India and caters to
health conscious buyers wary of the refined flour used in the regular
Maggi noodles. This move helps the brand in India as suburban
mothers, who feed the noodles to children as an afterschool snack, are
the primary customers of the brand.
Recently, a line of rice noodles and whole wheat with pulses, carrots,
beans, and onions has also been introduced in India. In fact, "Maggi"
has become a well-known brand for instant noodles in India and
Malaysia.
Nestlé India Ltd (NIL) offered a variety of culinary products such as
instant noodles, soups, sauces and ketchups, cooking aids (seasonings),
etc. Of these, instant noodles had been NIL's main product category in
the culinary segment since the launch of Maggi 2 Minute Noodles
(Maggi noodles) in 1982. Over the years, Maggi noodles became a
popular snack food product in India.
Claimed to be "2 minute noodles", The Maggi noodle cake and seasoning
is added into boiling water for two minutes and it is ready for
consumption.
Monopoly & Its Features
In economics, a MONOPOLY exists when a specific individual or an
enterprise has sufficient control over a particular product or service
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 that they provide and a lack of
viable substitute goods. The verb "monopolize" refers to the
process by which a firm gains persistently greater market share than
what is expected under Perfect Competition.
Market structure
In economics, monopoly is a pivotal area to the study of market
structures, which directly concerns normative aspects of economic
competition, and sets the foundations for fields such as industrial
organization and economics of regulation. There are four basic types of
market structures under traditional economic analysis: perfect
competition, monopolistic competition, oligopoly and monopoly. A
monopoly is a market structure in which a single supplier produces and
sells the product.
If there is a single seller in a certain industry and there are no close
substitutes for the goods being produced, then the market structure
is that of a "pure monopoly".
Sometimes, there are many sellers in an industry and/or there exist
many close substitutes for the goods being produced, but nevertheless
firms retain some market power. This is called monopolistic
competition, whereas in oligopoly the main theoretical framework
revolves around firm's strategic interactions.
In general, the main results from this theory compare price-fixing
methods across market structures, analyze the impact of a certain
structure on welfare, and play with different variations of
technological/demand assumptions in order to assess its consequences
on the abstract model of society. Most economic textbooks follow the
practice of carefully explaining the perfect competition model, only
because of its usefulness to understand "departures" from it (the so
called imperfect competition models).
The boundaries of what constitutes a market and what doesn’t are a
relevant distinction to make in economic analysis. In a general
equilibrium context, a good is a specific concept entangling
geographical and time-related characteristics. Most studies of market
structure relax a little their definition of a good, allowing for more
flexibility at the identification of substitute-goods.
Characteristics
Single seller: In a monopoly there is one seller of the good who
produces all the output. Therefore, the whole market is being
served by a single firm, and for practical purposes, the firm is the
same as the industry.
Market power: Market power is the ability to affect the terms
and conditions of exchange so that the price of the product is set
by the firm (price is not imposed by the market as in perfect
competition). Although a monopoly's 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.
Sources of monopoly power
Monopolies derive their market power from barriers to entry -
circumstances that prevent or greatly impede a potential competitor's
entry into the market or ability to compete in the market. There are
three major types of barriers to entry; economic, legal and deliberate.
Economic barriers: Economic barriers include economies of scale,
capital requirements, cost advantages and technological superiority.
Economies of scale: Monopolies are characterized by declining costs
over a relatively large range of production. Declining costs coupled with
large start up costs give monopolies an advantage over would be
competitors. Monopolies are often in a position to cut prices below a
new entrant's operating costs and drive them out of the
industry. Further the size of the industry relative to the minimum
efficient scale may limit the number of firms that can effectively
compete within the industry. If for example the industry is large
enough to support one firm of minimum efficient scale then other
firms entering the industry will operate at a size that is less than MES
meaning that these firms cannot produce at an average cost that is
competitive with the dominant firm. Finally, if long run average cost is
constantly falling. The least cost way to provide a good or service is
through a single firm.
Capital requirements: Production processes that require large
investments of capital, or large research and development costs or
substantial sunk costs limit the number of firms in an industry. Large
fixed costs also make it difficult for a small firm to enter an industry
and expand.
Technological superiority: A monopoly may be better able to acquire,
integrate and use the best possible technology in producing its goods
while entrants do not have the size or fiscal muscle to use the best
available technology. In plain English one large firm can sometimes
produce goods cheaper than several small firms.
No substitute goods: A monopoly sells a good for which there are no
close substitutes. The absence of substitutes makes the demand for
the good relatively inelastic enabling monopolies to extract positive
profits.
Control of Natural Resources: A prime source of monopoly power is
the control of resources that are critical to the production of a final
good.
Network Externalities: The use of a product by a person can affect
the value of that product to other people. This is the network effect.
There is a direct relationship between the proportion of people using a
product and the demand for that product. In other words the more
people are using a product the higher the probability of any individual
starting to use the product. This effect accounts for fads and fashion
trends. It also can play a crucial role in the development or acquisition
of market power. The most famous current example is the market
dominance of the Microsoft operating system in personal computers.
Legal barriers: Legal rights can provide opportunity to monopolise the
market in a good. Intellectual property rights, including patents and
copyrights, give a monopolist exclusive control over the production and
selling of certain goods. Property rights may give a firm the exclusive
control over the materials necessary to produce a good.
Deliberate Actions: A firm wanting to monopolise a market may engage
in various types of deliberate action to exclude competitors or
eliminate competition. Such actions include collusion, lobbying
governmental authorities, and force.
Why Maggi Plays a Monopoly in the Market
While monopoly and perfect competition mark the extremes of market
structures, there are many point of similarity. The cost functions are
the same. Both monopolies and perfectly competitive firms minimize
cost and maximize profit. The shutdown decisions are the same. Both
are assumed to face perfectly competitive factors markets. There are
distinctions, and reasons that why maggi has made a monopoly in the
Indian market.
Market Power - market power is the ability to raise the
product's price above marginal cost and not lose all your
customers. Perfectly competitive (PC) firms have zero market
power when it comes to setting prices. All firms in a PC market
are price takers. The price is set by the interaction of demand
and supply at the market or aggregate level. Individual firms
simply take the price determined by the market and produce
that quantity of output that maximize the firm's profits. If a
PC firm attempts to raise prices above the market level all its
"customers" would abandon the firm and purchase at the
market price from other firms. A monopoly has considerable
although not unlimited market power. A monopoly has the
power to set prices or quantities although not both. A
monopoly is a price maker. Nestle determined the price of
Maggi and other products were forced to keep their prices
according to the maggi. The two primary factors determining
monopoly market power are the firm's demand curve and its
cost structure.
Price - In a perfectly competitive market price equals marginal
cost. In a monopoly market price is greater than marginal cost.
As we can see that the marginal cost of maggi is less and the
market price is quite high as compared.
Marginal revenue and price - In a perfectly competitive
market marginal revenue equals price. In a monopoly market
marginal revenue is less than price.
Product differentiation: There is zero product differentiation
in a perfectly competitive market. Every product is perfectly
homogeneous and a perfect substitute. With a monopoly there
is high to absolute product differentiation in the sense that
there is no available substitute for a monopolized good.
Recently new brands have been introduced to give Maggi a bit
competition otherwise Maggi was ruling the Indian Markets
from more than 25 years now.
Number of competitors - PC markets are populated by an
infinite number of buyers and producers. Monopoly involves a
single Producer. Here Nestle was the only company producing a
product like Maggi.
Barriers to Entry - Barriers to entry are factors and
circumstances that prevent entry into market by would be
competitors and impediments to competition that limit new
firms from operating and expanding within the market. PC
markets have free entry and exit. There are no barriers to
entry, exit or competition. Monopolies have relatively high
barriers to entry. The barriers must be strong enough to
prevent or discourage any potential competitor from entering
the market. Maggi captured almost all the existing market
leaving a very little scope for the others to step in.
Elasticity of Demand - The price elasticity of demand is the
percentage change in demand caused by a one percent change
in relative price. A successful monopoly would face a relatively
inelastic demand curve. A low coefficient of elasticity is
indicative of effective barriers to entry. A PC firm faces what
it perceives to be perfectly elastic demand curve. The
coefficient of elasticity for a perfectly competitive demand
curve is infinite.
Excess Profits - Excess or positive profits are profit above
the normal expected return on investment. A PC firm can make
excess profits in the short run but excess profits attract
competitors who can freely enter the market and drive down
prices eventually reducing excess profits to zero. A monopoly
can preserve excess profits because barriers to entry prevent
competitors from entering the market.
Profit Maximization - A PC firm maximizes profits by
producing where price equals marginal costs. A monopoly
maximizes profits by producing where marginal revenue equals
marginal costs. The rules are not equivalent. The demand curve
for a PC firm is perfectly elastic - flat. The demand curve is
identical to the average revenue curve and the price line. Since
the average revenue curve is constant the marginal revenue
curve is also constant and equals the demand curve, Average
revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus
the price line is also identical to the demand curve. In sum, D =
AR = MR = P.
Supply Curve - in a perfectly competitive market there is a
well defined supply function with a one to one relationship
between price and quantity supplied. In a monopoly market no
such supply relationship exists. A monopolist cannot trace out a
short run supply curve because for a given price there is not a
unique quantity supplied As we know that the change in demand
can lead to changes in prices with no change in output, changes
in output with no change in price or both. Monopolies produce
where marginal revenue equals marginal costs. For a specific
demand curve the supply "curve" would be the price/quantity
combination at the point where marginal revenue equals
marginal cost. If the demand curve shifted the marginal
revenue curve would shift as well and a new equilibrium and
supply "point" would be established. The locus of these points
would not be a supply curve in any conventional sense.
The most significant distinction between a PC firm and a monopoly is
that the monopoly faces a downward sloping demand curve rather than
the "perceived" perfectly elastic curve of the PC firm. If there is a
downward sloping demand curve then by necessity there is a distinct
marginal revenue curve. Since all firms maximize profits by equating
MR and MC it must be the case that at the profit maximizing quantity
MR and MC are less than price which further implies that a monopoly
produces less quantity at a higher price than if the market were
perfectly competitive.
Surpluses and deadweight loss created by monopoly price setting
The fact that a monopoly faces a downward sloping demand curve
means that the relationship between total revenue and output for a
monopoly is much different than that of competitive firms. A
competitive firm faces a perfectly elastic demand curve meaning that
total revenue is proportional to output. Thus the total revenue curve
for a competitive firm is a ray with a slope equal to the market price. A
competitive firm can sell all the output it desires at the market price.
For a monopoly to increase sales it must reduce price. Thus the total
revenue curve for a monopoly is a parabola that begins at the origin and
reaches a maximum value then continuously falls until total revenue is
again zero. Total revenue reaches its maximum value when the slope of
the total revenue function is zero. The slope of the total revenue
function is marginal revenue. So the revenue maximizing quantity and
price occur when MR = 0.
A company with a monopoly does not undergo price pressure from
competitors, although it may face pricing pressure from potential
competition. If a company raises prices too high, then others may
enter the market if they are able to provide the same good, or a
substitute, at a lower price. The idea that monopolies in markets with
easy entry need not be regulated against is known as the "revolution in
monopoly theory"
A pure monopoly follows the same economic rationality of firms under
perfect competition, i.e. to optimize a profit function given some
constraints. Under the assumptions of increasing marginal costs,
exogenous inputs' prices, and control concentrated on a single agent or
entrepreneur, the optimal decision is to equate the marginal
cost and marginal revenue of production. Nonetheless, a pure monopoly
can -unlike a competitive firm- alter the market price for her own
convenience: a decrease in the level of production results in a higher
price. In the economics' jargon, it is said that pure monopolies "face a
downward-sloping demand". An important consequence of such behavior
is worth noticing: typically a monopoly selects a higher price and lower
quantity of output than a price-taking firm; again, less is available at a
higher price.
Thus Nestlé’s Maggi is a perfect example of a monopoly
market in India. It not only captured almost all the
market but even narrowed the entrance of any other
competitor to take over the market share.