Monopoly of Indian Railways : IIM Case Study
BY: YOGIN VORA ON MAY 13, 2009 24 COMMENTS
In economics, a monopoly (from the Latin word monopolium – Greek language monos, one +
polein, to sell) is defined as a persistent market situation where there is only one provider of a
product or service. Monopolies are characterized by a lack of economic competition for the
good or service that they provide and a lack of viable substitute goods.
Monopoly should be distinguished from monopsony, in which there is only one buyer of the
product or service; it should also, strictly, be distinguished from the (similar) phenomenon of a
cartel. In a monopoly a single firm is the sole provider of a product or service; in a cartel a
centralized institution is set up to partially coordinate the actions of several independent
providers (which is a form of oligopoly).
Primary characteristics of a monopoly
Single Sellers
A pure monopoly is an industry in which a single firm is the sole producer of a good or the sole
provider of a service. This is usually caused by barriers to entry.
No Close Substitutes
The product or service is unique in ways which go beyond brand identity, and cannot be easily
replaced (a monopoly on water from a certain spring, sold under a certain brand name, is not
a true monopoly; neither is Coca-Cola, even though it is differentiated from its competition in
flavor).
Price Maker
In a pure monopoly a single firm controls the total supply of the whole industry and is able to
exert a significant degree of control over the price, by changing the quantity supplied (an
example of this would be the situation of Viagra before competing drugs emerged). In subtotal
monopolies (for example diamonds or petroleum at present) a single organization controls
enough of the supply that even if it limits the quantity, or raises prices, the other suppliers will
be unable to make up the difference and take significant amounts of market share.
Blocked Entry
The reason a pure monopolist has no competitors is that certain barriers keep would-be
competitors from entering the market. Depending upon the form of the monopoly these
barriers can be economic, technological, legal (e.g. copyrights, patents), violent (competing
businesses are shut down by force), or of some other type of barrier that completely prevents
other firms from entering the market.
Price setting for unregulated monopolies
In economics a company is said to have monopoly power if it faces a downward sloping
demand curve (see supply and demand). This is in contrast to a price taker that faces a
horizontal demand curve. A price taker cannot choose the price that they sell at, since if they
set it above the equilibrium price, they will sell none, and if they set it below the equilibrium
price, they will have an infinite number of buyers (and be making less money than they could if
they sold at the equilibrium price). In contrast, a business with monopoly power can choose
the price they want to sell at. If they set it higher, they sell less. If they set it lower, they sell
more.
In most real markets with claims, falling demand associated with a price increase is due partly
to losing customers to other sellers and partly to customers who are no longer willing or able
to buy the product. In a pure monopoly market, only the latter effect is at work, and so,
particularly for inflexible commodities such as medical care, the drop in units sold as prices
rise may be much less dramatic than one might expect.
If a monopoly can only set one price it will set it where marginal cost (MC) equals marginal
revenue (MR) as seen on the diagram on the right. This can be seen on a big supply and
demand diagram for many criticism of monopoly. This will be at the quantity Qm; and at the
price Pm. This is above the competitive price of Pc and with a smaller quantity than the
competitive quantity of Qc. The offensive monopoly gains is the shaded in area labeled profit
(note that this diagram looks only at the case where there is no fixed cost. If there were a fixed
cost, the average cost curve should be used instead).
As long as the price elasticity of demand (in absolute value) for most customers is less than
one, it is very advantageous to increase the price: the seller gets more money for less goods.
With an increase of the price, the price elasticity tends to rise, and in the optimum mentioned
above it will be above one for most customers. A formula gives the relation between price,
marginal cost of production and demand elasticity which maximizes a monopoly profit:Â
(known as Lerner index). The monopolist’s monopoly power is given by the vertical distance
between the point where the marginal cost curve (MC) intersects with the marginal revenue
curve (MR) and the demand curve. The longer the vertical distance, (the more inelastic the
demand curve) the bigger the monopoly power, and thus larger profits.
The economy as a whole loses out when monopoly power is used in this way, since the extra
profit earned by the firm will be smaller than the loss in consumer surplus. This difference is
known as a deadweight loss.
Introduction to Indian Railways
Indian Railways (IR) is the state-owned railway company of India. Indian Railways had, until
very recently, a monopoly on the country’s rail transport. It is one of the largest and busiest
rail networks in the world, transporting just over six billion passengers and almost 750 million
tonnes of freight annually. IR is the world’s largest commercial or utility employer, with more
than 1.6 million employees.
The railways traverse through the length and width of the country; the routes cover a total
length of 63,940 km (39,230 miles). As of 2005 IR owns a total of 216,717 wagons, 39,936
coaches and 7,339 locomotives and runs a total of 14,244 trains daily, including about 8,002
passenger trains.
Railways were first introduced to India in 1853. By 1947, the year of India’s independence,
there were forty-two rail systems. In 1951 the systems were nationalised as one unit,
becoming one of the largest networks in the world. Indian Railways operates both long
distance and suburban rail systems.
Background
The development of IR had its roots in the 1800s, when India was a British colony. The British
East India Company and later, the British colonial governments were credited with starting a
railway system in India.
The British found it difficult to traverse great distances between different places in India. They
felt the need to connect those places with trains to speed up the journey as well as to make it
more comfortable than travel by road in the great heat. They also sought a more efficient
means to transfer raw materials like cotton and wheat from the hinterlands of the country to
the ports located in Bombay, Madras and Calcutta, from where they would be transported to
factories in England. Besides, the mid-1800s were a period of mutiny and struggle for
independence in India, with uprisings in several parts of the country.
The British leaders wanted to be able to transfer soldiers quickly to places of unrest. Railways
seemed to be the ideal solution to all these problems.
Work began on the development of railway systems in India in the early 1850s. Initially, trains
were used to transport material between different places. The first commercial passenger
train in India ran between Bombay and Thane (places in western India) on April 16, 1853.
Indian Railways – A monopoly
Abstract
In economics, monopoly (from Greek monos (alone or single) + polein (to sell)) exists when delivery
of a particular product or service is completely controlled by an individual or an enterprise. This is in
contrast to monopsony where there is only one buyer of a particular product or service; however
there can be more than one provider. It is also different from cartel (a form of oligopoly) wherein
several providers establish an institution and coordinate their actions and services.
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 4 th 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 customer's
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
a. Indian railways plan to have online auctions of the freight capacity. This will allow better utilization of
freight capacity and boost revenues.
Source: [Link]
whiletravellingintrains/articleshow/[Link]
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 1 st 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.
Bangalore to Delhi Bangalore to Nagpur Nagpur to Delhi
Rajdhani 1st AC fares 4555 3245 2845
* All prices in Indian rupees for 1st February 2011 as noted on 16th December 2010 [Link]
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.
Sample fares for 1st AC for different number of days are as follows
½ day 1 day 2 day 4 day 7 day 15 day 21 day 30 day
Adult 26 43 70 110 135 185 198 248
Price/day 52 43 35 27.5 19.28 12.33 9.42 8.27
* All prices for 1ST AC in US dollars from [Link]
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.
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
* All prices for 1ST AC from Bangalore to Delhi obtained from [Link]
b. Indian railway discounts the price of its tickets for different type of passengers. For example, they
offer different concessions to students, patients, sports person, handicapped person, teachers,
unemployed youth etc. These discounts make the rail travel attractive to the targeted consumers,
who might choose other mode of transport.
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 Unemployed Youth for Interview 100%
* All discount codes applicable for 1ST AC from Bangalore to Delhi obtained from[Link]
c. Indian railway additionally charges a convenience charge ranging from Rs 10 to Rs 20 for all the
tickets booked online, thereby discriminating on the location of purchase of ticket. This charge
commands premium from the customers who are willing to pay a little extra in exchange of the
convenience from booking from home or internet café avoiding queues at railway reservation
centers.
d. Indian railway provides circular journey tickets specially targeted for customer segment intending for
sightseeing or pilgrimage trip. Circular Journey Tickets provides consumer the benefit of telescopic
rates, which are considerably lower than regular point to point fare. They are issued for all journeys
which begin and complete at the same station and can be purchased for all classes of travel
For instance, let’s see the circular journey fare
Route Circular Journey
Fare (1st AC)
New Delhi - Kanpur Central – Varanasi – Puri – Howrah – Patna 2458
– Barauni – Muzaffarpur – Raxual – New Delhi (4410 Kms)
Source: [Link]
Individual leg fare for the same route
Route Train Name Fare (3rd AC)
New Delhi – Kanpur Central Magadh Mail 564
Kanpur Central – Varanasi Shiv Ganga Exp 861
Varanasi – Puri Neelachal Exp 988
Puri – Howrah Puri Hwh Exp 631
Howrah – Patna Poorva Exp 705
Patna – Barauni Mahananda Exp 235
Barauni – Muzaffarpur Vaishali Exp 274
Muzaffarpur – Raxual Mithila Exp 387
Raxual – New Delhi Satyagraha Exp 897
Total fare 5542
Source: [Link]
e. Indian railway introduced 6% freight concession for traffic booked from other states for stations in
North Eastern states in the budget of 2008-2009. In this case discrimination is based on the
destination.
4. Peak-load pricing: Practice of charging higher prices during peak periods when capacity
constraints cause marginal costs to be high. Indian railway employs this type of discrimination by
differential discounts in peak and off-peak seasons
a. Indian railway launched ‘Empty Flow Direction Freight Discount Scheme’. To ensure better utilization
of empty wagons in the return direction, Railways introduced a freight discount of 30 percent during
lean season and 20 percent during peak season on incremental loading in the empty flow direction
Source: [Link]
b. Indian railway launched ‘Two Leg Freight Discount Scheme’. If trainload traffic is offered in covered
wagons for both up and down directions, then, a discount of 20 percent in lean season and 15
percent in peak season would be given for traffic in both directions
Source: [Link]
5. Inter-temporal price discrimination: Practice of separating consumers with different demand
functions into different groups by charging different prices at different points in time. Indian railway
employs this type of discrimination through their Tatkal Seva.
a. Indian railway additionally levies Tatkal (emergency) charges on passengers for booking on short
notice. Tatkal charges have been fixed as a percentage of fare at the rate of 10% of basic fare for
second class and 30% of basic fare for all other classes subject to minimum and maximum as given
in the table below
Class of Travel Minimum Tatkal Charges Maximum Tatkal Charges
Second (sitting) 10.00 15.00
Sleeper 75.00 150.00
AC Chair Car 75.00 150.00
AC 3 Tier 200.00 300.00
AC 2 Tier 200.00 300.00
* Information is obtained from [Link]
What’s not price discrimination
If an individual or an enterprise engages in differential pricing for products with similar/different
attributes, then it cannot be termed as price discrimination. This is because the difference in
attributes can possibly be coming from different costs of production.
Indian railways charge different prices for saleable units that belong to different classes on a train or
that belong to same class on different train operating on same route. For instance, a passenger
ticket from Bangalore to Delhi has different prices. However this will not classify for price
discrimination as these products though similar are not identical.
Similarity is that they provide right to a passenger to travel from Bangalore to Delhi on same date,
but they differ on attributes like time of travel, comfort and luxury etc.
Train 1st AC 2nd AC 3rd AC Sleeper
Sampark Kranti 3560 2098 1528 563
Rajdhani 4555 2725 2085 Not Available
Karnataka Express 3427 2021 1473 544
* All prices in Indian rupees for 1st February 2011 as noted on 16th December 2010 from [Link]
Summary
Indian railway engages in policy of price discrimination in various ways. They have heavily used third
degree of price discrimination, exploited second degree of price discrimination also and is yet to
explore first degree of price discrimination. They have also successfully engaged in peak load and
inter temporal price discrimination. Data shows that they have fared well in recent years and are still
provides the cheapest mode for long distance of travel for common man between most of the
destinations within India.
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10) Managerial Economics by G.S. Gupta (Page 158, Second degree price discrimination)
