The monopoly market exists when there is a huge number of a
buyers, but a small or very limited number of sellers in the market. Many
economists argue that monopolies have shortcomings. However, it has also advantages
to the country’s economy. In the first part of this course work, the advantages
and efficiencies of monopolistic market are described. In the second part, the real case for
Uzbekistan monopolistic market is given. The rise of the company, the social costs which are used by
this company and the reaction of government to this monopolistic company are analysed
critically in this section also. The social costs associated with government in markets are defined in
the last section providing the real facts and statistical data.
As it is has been mentioned in the introduction part that
monopoly is not as bad as thought by economists, it also has advantages which
are described below.
stability. As Galbraith (Galbraith, 1936) states in the market
of monopolies prices are stable in most cases. This is because there is only
one firm in the market that sets prices. In other types of market structures,
prices are unstable and tend to be elastic as a result of competition that
exists, but this does not apply to a monopolistic market, since competition is
generally absent or non-existent. Price stability aids to achieve high levels of economic activity and
employment by increasing the transparency of the price mechanism, reducing
premiums for inflation in interest rates and promoting financial stability (EuropeanCentralBank, 2017).
Source of revenue for the government. The government receives income
in the form of taxation from monopolistic firms. In addition, the government
can grant patents and licenses to generate more income (ADAMS,
Dwight R. Lee and Robert D. Tollison (Tollison, 2011) argues that due to
the lack of competitors, which leads to high number of trading, monopolistic firms
usually receive excess profits from their activities. Mass profits can be used
in such things as launching other products, conducting research and development
among many others that may be useful to the firm.
Research and development. Michael Reksulak,
William F. Shughart II, Robert D. Tollison indicates that monopolies can obtain extra profits, which
can be used to fund high-cost capital investments. Once protected from competition monopolies may undertake process
innovation or product to originate higher profits, and doing so become
dynamically efficient. Successful research can be used
to improve products and reduce costs in the long term. This is significant for
such industries as the production of aircraft, pharmaceuticals and telecommunications.
There may be less development of medications and a high risk of failure without
monopolistic power that a patent gives. Monopoly’s profits give greater
confidence in the risk management and whereas common financial researches may be
useless (Michael Reksulak, 2008).
Economies of scale.
Increased output will lead to a
decrease in the level of average production costs. They can be transferred to
consumers in the form of lower prices. This is important for the industries
with high fixed costs, such as water and steel products. In case if they begin
to expand their activities. The company can cope with the savings, if possible:
when a company buys deposits for production in bulk, it can take advantage of
volume discounts that can be used for sale by the company. As the scale of
production increases, the company can apply specialized workers and mechanisms,
which lead to greater efficiency. This is due to the fact that employees will
be better prepared for a particular job, it will spend for several months or
years than an employee who will be new to the company, and therefore specialization
helps the company complete its work at an early stage and efficiency increases
R. Plott, 1994).
Avoidance of duplication of infrastructure. Natural
when all or most of the available economies of scale have been derived by one
firm, can avoid a wasteful duplication of rare resources. The example can be
gas, rail and electricity supply, which are established by government. In this
case, Government will prevent other firms from entering the market. But even if
government permits existence of more
than one firm, it will derive a wasteful duplication of scarce resources (Bamzai, 2004).
monopolies can use price discrimination, which benefits economically weaker
segments of society Price discrimination
is one of the competitive methods used by larger, established companies in an
attempt to profit from differences in supply and demand from consumers. Price
discrimination is a pricing strategy that arises when a company collects a
different price for different consumers for the same service or product. The
company can increase its revenue by charging to each customer the maximum
amount that they are ready to pay, eliminating surplus consumers, but it is often
tough to decide what price for each purchaser to set. In order price
discrimination to prosper, companies need to know their client base and its
needs, and should be familiar with the several types of price discrimination used
in the economy. (Mark Armstrong,
1993). The most common types of price discrimination are first,
second and third degree discrimination
First degree price discrimination. Daniel L.
White, Michael C. Walker states that in perfect business world, companies will
be able to eliminate all consumer surpluses at the expense of discrimination at
a price of the first degree. This
pricing strategy occurs when businesses can precisely determine how much each buyer
is willing to pay for a specific service or product and sell this service or product
at that exact price. Authors mention
that in certain industries, such as the sale of used vehicles, waiting for
negotiations on the final purchase value is the part of the procurement
process. A enterprise that sells a second-hand car can gather information
through the intellectual data analysis relating to past purchasing habits, income
budget and maximum available products for each buyer to determine what to
charge for each car sold. This pricing strategy
takes a long time and is difficult for most industries, but it permits the
seller to fix the maximum amount of available revenue for each sale (Daniel L. White,
Second degree price discrimination. Michael L. Katz (Katz, 1984) suggests that in the
second degree of price discrimination, the ability to collect information about
each potential buyer is missing. Instead, companies sell goods or services in
different ways based on the preferences of different groups of consumers.
Most often, enterprises apply discrimination at the price of
the second degree due to quantitative discounts; buyers buying in wholesale obtain special offers that are
not available to those who purchase one service or product. This pricing
strategy is often used in retail stores of storage facilities such as Sam’s
Club or Costco, but it can also be seen in companies that offer customers
loyalty or reward to frequent customers. Second price discrimination does not totally
eliminate customer surplus, but it permits the business to raise its revenue
margins on a subset of its customer base.
Third degree price
discrimination. Youngsun Kwon (Kwon, 2006) explains that a
third degree of price discrimination arises when businesses price services and products
differently based on the exclusive demographics of subsets of their customer
base, such as students, military personnel or the elderly.
Businesses can better
understand the comprehensive features of customers than the purchasing
preferences of individual buyers. The third degree of price discrimination delivers
a way to decrease the customer surplus by decreasing the elasticity of demand
for exact consumer subsets.
This type of pricing
strategy is often used in the sale of tickets to the railway, the fees of entry
to restaurants or amusement parks. Customer groups that otherwise cannot or do
not prefer to purchase a product or service because of their minor revenue are
accounted for by this pricing strategy, increasing the business’s revenues.
The State and joint-stock railway company «Uzbekiston Temir Yullari»
The State and joint-stock railway
company «Uzbekiston Temir Yullari» was founded by the decree of the President of
the Republic of Uzbekistan on November 7, 1994, No. UP-982 on the basis of the linear divisions, the
enterprises, the organizations and establishments of railway transport located
in the territory of the Republic of Uzbekistan. Later, in 2001, according to
the state program of reforming of railway transport determined by the Decree of
the President and resolutions of the Cabinet of the Republic of Uzbekistan, the
unitary state enterprise «Uzbekiston Temir Yullari» was transformed to open joint stock company
where 100% of shares belong to the state. This means that «Uzbekiston Temir
Yullari» is a natural monopolistic company (UzbekistonTemirYullari, 1994 – 2017).
It can also be called as an
efficient monopoly because company has developed and implemented new
technologies like a high speed railway traffic, construction of metal bridges
with long flights, construction in the mountain and on the rivers. Moreover,
company is trying to keep service costs low enough to undercut competitors who
sell close substitute services (UzbekistonTemirYullari, 1994 – 2017).
Company highly uses third degree
price discrimination model in selling their service. According to the official web site of the company (UzbekistonTemirYullari, 1994 – 2017), a buyer of service,
or in other words a passenger, has the right to take one child aging till five
to the train to take with themselves free of charge without granting a separate
place. If the passenger is followed with more than one child aged till five, one
of them is transported free of charge, the other – with 50 percentage discount
from tariff cost with granting a separate place. For children aged from five
till ten years 50 percentage discount from tariff cost with granting a separate
place is also provided. For children elder than 10 years are considered as
seniors and have to get tickets, as for adults. In addition, the right for a 50
percent discount from fare by rail in exchange for coupons and upon
presentation of the certificate is granted once a year (two way ticket) to
disabled people of the Great Patriotic War of 3rd groups, to
participants of the Great Patriotic War and persons to them equated. Moreover,
according to the operating statutes, resolutions of the government of
the Republic of Uzbekistan and the Agreement of the Commonwealth of Independent
States of March 12, 1993 “About mutual recognition of the rights for
preferential journey for disabled people and participants of the Great
Patriotic War, and also persons equated by it” — signed with Heads of
governments the right of a free pass by rail is granted once a year (there and
back) to the Heroes of the Soviet Union and persons who are awarded the order
“Slava” of all three degrees, to disabled veterans of 1st and 2nd
groups; from among the military personnel, injured workers and employees and to
persons equated to them and to disabled people to liquidators of accident on
the Chernobyl Nuclear Power Plant (within the Republic of Uzbekistan). It can
be said that abovementioned social cost positively effects on society. (UzbekistonTemirYullari, 1994 – 2017).
Nevertheless, there are social costs
which can negatively effect on the environment. These are the costs of impacts
such as noise, air, land and water pollution and accidents. These impacts
differ by mode, country, and circumstances and affect overall transport systems
sustainability and transport policies.
Also there is a cost for the railway infrastructure network which
includes capital and maintenance costs for track, engineering structures such
as bridges and tunnels, train signaling, communications systems, power supply
in electrified sections, and terminal infrastructure. Economists have different
theories in explaining whether investment cost for infrastructure is a positive
or a negative social cost. Chris Nash, Jeremy Shires (Chris Nash, 2009) says that
investment cost for infrastructure has regional benefits. Construction of
railways and abovementioned issues can reduce unemployment rates. In addition,
it raises monopoly competition. Other Economists say that an investment cost is
accumulated by taxes paid by citizens and by budget of the government, which is
why it is a negative social cost. In this case, both theories seem to be
applicable (GALLO, 1994). The company which is initially founded by
taxes of citizens and government budget in 1994 now has more positive effect on
the economy of the Republic of Uzbekistan than the negative effect. One example
is that nowadays «Uzbekiston Temir Yullari»
than 75 000 people with employment.
Government role in the State and joint-stock railway
As railway transport is a
strategically important object, the government regulates every step of the
company activity. The President of Republic of Uzbekistan on 15th April 1999, N
766-I signed a decree about the railway transport. This decree which includes
28 Articles regulates almost all aspects of the railway transport. For example,
according to Article 13, tariffs for the carriage of goods, passengers and
cargo luggage on railway transport are established by considering the interests
of consignors and passengers by the state body of rail transport in the manner
determined by the Cabinet of Ministers of the Republic of Uzbekistan. Using
this Article government eliminates monopoly pricing, perfect price
discrimination. In Article 7 it is written that in order to ensure the safety
of the population, as well as the normal operation of railroads and other
railway transport facilities located on lands prone to landslides, landslides,
washouts, mudflows and other hazardous influences, security zones are
established. The procedure for establishing security zones, their size, the
regime for the use of land allocated for these purposes, are also established
by the Cabinet of Ministers of the Republic of Uzbekistan. However, there is no
Article about elimination rules of negative effects of railway transport on
natural environment. Government should have taken some measures to eliminate
these costs for instance by implementing suggestions made by International Union of Railways and Community of European
Railway and Infrastructure Companies. According to them, The Company can raise
energy efficiency through approaching eco-driving, using of new rolling stock,
and operational measures. Also electric railways could achieve zero air, land and water pollutions if the electricity production is sourced from
renewable energy sources. To reduce the noise EU recommends using noise
barriers and insulation of windows of homes near the railway. (Johannes Ludewig, Luc Aliadiere, 2008). However,
implementing those recommendations to internalize the social costs arised by «Uzbekiston
Temir Yullari» will need more research
as the overhead costs associated with launching the project could be very high
or other unexpected consequences could occur. «Uzbekiston Temir Yullari»
cooperates with «Talgo» who has sold high speed trains which raises energy
efficiency and partially reduces abovementioned social costs. But it would be
more effective if government regulated the elimination of those social costs
under the written legal procedures.
Social costs associated with government intervention in monopolistic market.
intervention into the monopolistic market leads to both positive and negative
social costs. One of the main positive effects is price regulation. Government
can prevent monopolies charging consumers excessive prices for their products
and services, which can result in a loss of allocative efficiency. It can make
services from utility companies such as gas and electricity more affordable,
which is helpful to households. Another positive social cost is quality.
Governments can ensure companies are meeting minimum goals, which ensures companies
focus on increasing social welfare (Posner, 1975).
One of the
worst effects of government interventions is regulatory capture. This happens
when policy makers start working in the interest of the company, for some
private benefits or due to the impartial information rather than in consumer
interests (Straub, 2009). For example in case of Uzbekistan, it
is a company named after LLC «Avtotest Report» which teaches how to drive a vehicle. How government lobbied
it? First of all, the Cabinet of Ministers of the Republic of Uzbekistan issued
the Decree dated 31.12.2010 No. 325 in pursuance of the resolution of the
President of Uzbekistan dated 19 August 2010 No. PP-1392, according to which,
from April 1, 2011, private commercial structures engaged in training and
retraining drivers of motor vehicles and urban electric vehicles stopped this
type of activity. However, then, the Resolution of the Cabinet of Ministers
dated 30.04.2015 ?106 was adopted, which provided for the inclusion of certain
private commercial structures in the list of organizations that have the right
to carry out activities for the training and retraining of drivers of vehicles
and urban electric vehicles. After this resolution only one private company ???
had opened its first branches in Tashkent. Moreover, according to the decree of
Cabinet of Ministers Uzbekistan dated 04.09.2017 ?693 drivers
of vehicles that belong to legal entities are required to take classes to
upgrade their skills every two years in LLC
(Anhor, 2017). It is clearly seen
that there is a high negative social cost to society which is occurred by
Another negative cost is asymmetric information. The issue
of asymmetric information can make it hard to define what level a price limit should
be imposed at by government regulators when intervening where there is market
failure. For example it is hard to decide without sufficient information what
the cost of pollution to society is. Different people will put a different
value on it, depending on their own experiences with pollution, such as how
polluted their home town is, which could lead to make incorrect decisions and
to a waste of resources (Posner, 1975).
It can be
said that monopolistic market can positively or negatively affect the society
depending on how the people implement it.
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