Monopoly in Indian economy

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ECONOMICS PROJECT ON
Concept of monopoly in indian economy

Hidayatullah National Law University
Raipur, Chhattisgarh
Submitted to:
Miss. Eritriya Roy
(Assistant Professor, Economics)
Submitted by:
AAKASH BHATT
Roll No.-4
Semester- I, B.A.L.LB.(Hons.)

Monopoly in Indian economy
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TABLE OF CONTENTS
1. Certificate of Declearation....... 03
2. Acknowledgment.......................................................................... 04
3. Introduction...... 05
4. Objectives.. 06
5. Research Methodology............................................................................ 06
6. Advantages and disadvantages of monopoly. 07
7. Monopoly price and output determination ...........08
8. Examples of government monopoly....... 08
9. Natural monopoly and demand curve............... 09
10. Monopoly in Indian railway................... 10
11. Monopoly in Indian industry......... 12
12. Indian monopolistic behavior 15
13. Characterstic feature of monopolistic competition. 20
14. Conclusion................................................................................................22
15. Bibliography/Webliography......23






Monopoly in Indian economy
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Certificate of Declaration

I hereby declare that the project work entitled monopoly in Indian economy submitted to
HNLU, Raipur, is record of an original work done by me under the able guidance of
Miss. Eritriya Roy, Faculty Member, Economics, HNLU, Raipur.



AAKASH BHATT
ROLL NO. 4
SEM-1
B.A.L.LB.(Hons.)





Monopoly in Indian economy
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Acknowledgements

Thanks to the Almighty who gave me the strength to accomplish the project with sheer
hard work and honesty. This research venture has been made possible due to the generous
co-operation of various persons. To list them all is not practicable, even to repay them in
words is beyond the domain of my lexicon.
This project wouldnt have been possible without the help of my teacher
Miss. Eritriya Roy at HNLU, who had always been there at my side whenever I needed
some help regarding any information. He has been my mentor in the truest sense of the
term. The administration has also been kind enough to let me use their facilities for
research work. I thank them for this.

















Monopoly in Indian economy
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Introduction
The term monopoly is derived from Greek words mono which means single and poly which
means seller.

So, monopoly is a market structure, where there only a single seller producing a product having no close
substitutes.

This single seller may be in the form of an individual owner or a single partnership or a
Joint Stock Company. Such a single firm in market is called monopolist.

Monopolist is price maker and has a control over the market supply of goods






Characteristics

Only one single seller in the market. There is no competition.
There are many buyers in the market.
The firm enjoys abnormal profits.
The seller controls the prices in that particular product or service and is the price maker.
Consumers dont have perfect information.
There are barriers to entry. These barriers may be natural or artificial.
The product does not have close substitutes







Monopoly in Indian economy
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Objectives
(1).The main objective of this project to is to study monopoly in Indian economy
(2).Another main objective is to study the sectors in which monopoly is there in indian
economy.
(3).Also I would study the monopolistic behavior of Indian society.
Focusing on these objectives I will try to explain the concept of monopoly in indian economy.


Research Methodology:
This project work is descriptive & analytical in approach. It is largely based on the analysis of
economic growth and development and its different factors. Books & other references as guided
by faculty of economics were primarily helpful for the completion of this project.




Monopoly in Indian economy
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Advantages of monopoly
Monopoly avoids duplication and hence wastage of resources.
A monopoly enjoys economies of scale as it is the only supplier of product or service in
the market. The benefits can be passed on tothe consumers.
Due to the fact that monopolies make lot of profits, it can be usedfor research and
development and to maintain their status as amonopoly.
Monopolies may use price discrimination which benefits theeconomically weaker
sections of the society. For example, Indian railways provide discounts to students travelling
through its network.
Monopolies can afford to invest in latest technology and machineryin order to be efficient
and to avoid competition.



Disadvantages of Monopoly
Poor level of service.
No consumer sovereignty.
Consumers may be charged high prices for low quality of goods and services.
Lack of competition may lead to low quality and out dated goods and services.

Monopoly in Indian economy
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The Profit-Maximizing Output Level
To maxi mi s e pr of i t , t he f i r m s houl d pr oduce level of output where MC = MR
and MC curve crosses MR curve from below.
F o r a mo n o p o l y , p r i c e a n d o u t p u t a r e n o t independent decisions But
different ways of expressing the same decision

MONOPOLY PRICE AND OUTPUT DETERMINATION




Why Monopolies Arise?

Ownership of a key resource.
The government gives a firm the exclusive right to produce some good.
Costs of production make one producer more efficient than a large number of producers


Example of Government Monopoly

Indian Railways has monopoly in Railroad transportation
State Electricity board have monopoly over generation and distribution of electricity in many of
the states.
Hindustan Aeronautics Limited has monopoly overproduction of aircraft.
There is Government monopoly over production of nuclear power.
Operation of bus transportation within many cities.
Land line telephone service in most of the country is provided only by the government run
BSNL.

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Natural Monopolies

An industry is a natural monopoly when one firm can supply a good or service to an
entire market at a smaller cost than could two or more firms.
Example: delivery of electricity, phone service, tap water,etc.







Demand Curves for Competitive and Monopoly Firms



price competitative firm demand curve monopolists firm demand curve
price

demand


demand
0 Quantity of demand 0 Quantity of demand



Monopoly in Indian economy
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Monopoly in Indian Railways
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 labelled 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: (known as Lerner index). The monopolists 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.

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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 countrys 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 worlds 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 Indias 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.
Indian Railways are one of basic infrastructure support of India. Like all infrastructure
resources e.g. iron and steel, aluminium, oil and petroleum, LPG, the Indian railways are basic
transportation mode of the common man.
Also the government owns the railways. There is a separate railways budget which is planned
every year in the planning cycle.
Govt can sell off the railways or atleast their parts to pvt operators. But that hasnt yet
happened in India. There are some SPV (Special Purpose Vehicles) projects which railways
have undertaken in public and pvt participation, but nothing on the lines of divesting the
railways to pvt players. It might be a good idea. But the railways today are one of largest,
cheapest mode of transportation. They are also one of most profit making public sector
enterprise.
In that sense the Indian railways is not a monopoly but a govt controlled organization.
If we talk in the context of transportation sector: Indian railways is definitely not a monopoly,
we have air travel, land travel, sea travel modes too....but yeah Indian Railways would be
largest in that sector too and hence we could call it a monopoly in that sense.

Indian railways follow following properties:-
1. Single seller
2. No close substitutes
3. Price maker
4. Sole manufacturer so blocks the entry
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1
Why Monopoly in Indian railways?
To maint a i n Gove r n m en t control Consistent Revenue Generating Business
To have single Coordinating Authority
Security reasons
Contributing towards growth of the country
Providing service to remote areas


Pros and cons of monopoly in Indian railways
Pros

Competition from low cost airlines still not a threat to the monopoly of railways
Price cross subsidization
Regular service
Cons
No alternative to long distance middle class commuters.
Poor service Quality Price maker.
High travelling time.
Poor fund generation for development.
Unable to cope up with high load.

Monopoly in Indian Industry
Any approach to the study of monopolistic behavior in Indian industry and especially attempts at
constructing a theory underlying such behavior-must base itself squarely on the reality of today's
Indian economy. The approach must base itself also on such premises about behavior, for
instance the maximizing motive, which themselves reflect the material reality. Unhistorical
and/or non-materialistic approaches would fail to discern the distinguishing characteristics of
monopolistic behavior in Indian industry. Such a study will thus attempt to emphasize (a)
monopoly capital, the highest form of capital in Indian industry today and (b) the business group,
the most representative unit of monopoly capital. The study will be incomplete if it is not
undertaken in relation to the distinguishing characteristics of the Indian economy today. These
characteristics are principally three. First, India remains an underdeveloped economy basic-ally
still in the process of growth. Secondly, the role of the State is- significant, in terms of both
direct State ownership of the means of production and use of State economic policies for
promoting and regulating private economic activity. Thirdly, foreign capital is significant in
India, quantitatively and qualitatively, and indigenous monopoly is itself linked with it
I ndian Business Groups: Some Relevant Characteristics:-
Having identified the business group as the most representative unit of monopoly in India we
now proceed to consider some relevant historical characteristics of Indian business groups. Two
specific features of the organizational structure of domestic business groups need to be

1
1.See R K Hazari, op cit; MIC Re-port, pp 2 and 33; ILPIC Report, p 11.
Monopoly in Indian economy
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highlighted. The first is the family-ownership character of almost all the business groups of
Indian origin.
1
The significance of this feature is that unitary decision-making, normally
characteristic of families, can well lead to a greater centralization of capital in the hands of a few
than can dispersed, individual ownership. The family character of Indian business groups bears
remarkable similarity to that of the Zaibatsu houses in post-Meiji Japan.
2
The second
organizational characteristic is crucial to our argument. This is that the usual unit of decision in
the Indian corporate private sector is not the individual joint stock company but the business
group. Though each of the corporate units under the control of a business group is a separate
legal entity, the group nevertheless functions as a single coordinated organization. The Annual
Reports
3
of companies belonging to the same group abound with examples of such coordinated
group behavior, especially with respect to the co-ordination of the quantum and the timing of in-
vestment, the use of intra-group loans and collateral guarantees, the coordination of selling
activities, attempts to restrict sole-selling agency rights to companies within the group, the maxi-
mum use of technological indivisibilities and excess capacities within the group, etc. Thus it
appears that the decisions regarding price, output and especially investment are taken with
respect to the group as a whole and not with respect to the individual companies belonging to the
group. The implication of this for our study is that the maximization behavior of a business
group has to be defined with respect to the group as a whole, not the constituent firms of the
group, individually. We shall now deal with the most general industrial characteristics of Indian
business groups, not at length but only to the extent that such an analysis helps our understanding
of the behavioral characteristics of a business group. We shall here consider: (i) the control that
business groups have over instruments of channelization of funds, (ii) the diversified pattern of a
business group's investment and technological integration within the group, (iii) growth of the
group through acquisition, (iv) the sharing out of individual markets by different groups and (v)
the interpenetration of the capital of different groups.
(i) Control over Financial Intermediaries: The instruments of chanellisation of domestic funds
for practically all the business groups have been one or more, in some cases all, of the following:
own banks, closely connected banks, own insurance, investmenir and trust companies. The
question of State financial assistance to business groups, which has been significant, falls outside
the scope of the present paper. Prior to bank nationalization, the following banks were identified
4

as being controlled by one or the other of the business groups: Punjab National Bank, Universal
Bank of India and the National Bank of Lahore with Sahu-Jain; New Bank of India, Didwana
Industrial Bank and Shriniwas Banking with Bangur; Bank of Karai-kudi and Bank of Madura
with Thiagaraja; United Commercial Bank with Birla; Hindustan Mercantile Bank with
Soorajmull Nagarmull; Oriental Bank of Commerce with Thapar; Hindustan Commercial Bank
with Juggilal Kamlapat and Indian Overseas Bank with Muthia. Of these, the Punjab National
Bank and United Commercial Bank figured among the first five private sector banks, and the
Indian Overseas Bank and Hindustan Commercial Bank, besides, figured among the top 20
private sector banks.
5
The business groups, if not in control of banks, maintain close connections
with banks, especially the leading ones, either through minor ownership of bank share-capital
6
or
through inter-locking of directorates.
7

2


2
2. "Present Status of the Former Zaibatsu Enterprises", Mitsubishi Economic Research Institute, Tokv yo, 1955, p 11.
3. CLB, Ministry of Company Affairs the Annual Reports in the CLB Library.
4.See the ILPIC Report, Appendi-ces, Vol II, p 93.
5."Top Scheduled Banks" Company News and Notes, January 16, 1968, pp 423-429
Monopoly in Indian economy
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The importance of such inter-link-age through minor ownership of shares and inter-locking of
directorates is brought out by the following. First, in 1966 the top 20 private sector banks
accounted for 61.7 per cent of all (including the State Bank of India) scheduled bank deposits
and 73.2 per cent of all scheduled bank advances. Of this, the top 5 private banks ac-counted for
37.8 per cent of all bank deposits and 45.9 per cent of all bank advances.
8
Thus bank deposits
and advances in the organised sector were concentrated in the leading tanks.

Secondly, the advances made by the 20 leading private banks to their directors and companies
and firms in which these directors were interested as a proportion of aggregate advances made
works out to about 10 per cent in 1966. These ratios were even larger in the case of Bank of
Baroda (24.0 per cent), United Commercial Bank (15.5 per cent) and Bank of India (13.1 per
cent).
9
The conclusion from all this is that by maintaining close connections with leading banks,
the business groups were assured of one major source of finance. The more important, if not all,
of the business groups own/owned (i e, prior to nationalization of both insurance and general
insurance) insurance, investment and trust companies which complement banks as organized
instruments for channelizing finance for purposes of production and investment. We will
consider the case of investment companies as an illustration of this kind of financial institution.
Of 56 genuine investment companies in India in 1964-65, only 13 were independent companies
without group association.
10
The remaining 43 were linked to one or the other of these monopoly
houses; Tata, Birla, Martin-Burn, Dalmia,Sahu Jain, Bangur, Juggilal Kamlapat, Andrew Yule
and Bird-Heilgers. The major proportion of the investment of these group companies took the
form of investment within the group itself with Tata having the lowest proportionate own to total
investment (30 per cent). (ii) Diversification and Technological Integration: The broad pattern of
this investment was wide occupational diversification, marked by consider-able technological
integration. By diversification we mean
11
the presence of a company or a group in more than one
industrial category.
Iron ore, coal, other minerals, various alloys, various chemicals, steel structurals, machine-tools
and refractorys required in the production of steel also fall in Tata's domain. In turn, the coal
mining machinery and drilling equipment required for mining coal, and the chemical machinery
required by the chemical industry are also produced by Tatas. For Tata's other main
preoccupation, commercial vehicles, the required steel, tyres, tubes, special tools, spark plugs,
auto leaf springs, etc, are all produced by one or the other Tata companies. Tata produces
pharmaceuticals as well as pharmaceutical machinery; paper as well as paper machinery; cement
(in ACC, an outer circle company) as well as cement mill machinery. The Birlas' production of
automobiles is highly integrated with most of the parts and accessories required being produced
within the group it-self. Birlas manufacture cotton textiles, chemicals like sulphuric acid and
calcium carbide required in the bleaching and dyeing of textiles and also textile machinery like
looms, carding engines, ring frames, etc. Synthetic textiles is another preoccupation of the Birlas;


6. "Pattern of Ownership of Selected Top Banks", Company News andl Notes, July 1, 1968, pp 1063- 1064.
7 "Inter-locking of Directorships: Banking and Non-Banking Com-panies", Company News and Notes, October 1967, p
113.
8 "Top Scheduled Banks", Company News and Notes, op cit.
9 Ibid. - 10 M Y Khan, "Growth and Struc-ture of Investment Companies in India, 1956-57 to 1964-65", Com-pany News
and Notes, August 16, 1968, p 1216.
11 M Gort, "Diversification and In-tegration in American Industry", Princeton, 1962, p 11
Monopoly in Indian economy
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they also produce rayon yarn, viscose staple fibre, acetate .rayon yarn, acetone, acetic and rayon
plants required for manufacturing synthetic textiles.



Birlas produce sugar as well as sugar mill machinery. Martin Burn, till recently engaged in
railway transport, produced railway wagons, railway sleepers, light and heavy rails, railway coil
springs and locomotive springs; and going further back in the technological chain, Martin Burn
also produced steel; and refractories, iron ore, fireclay, magnesite, etc. The Walchands produce
confectionery, the sugar required for it, also the sugar cane (in their Ravalgaon farm), the boilers
and water treatment plants for processing the cane and the sugar mill machinery required for
producing sugar itself. Sborajmull Nagarmulls produce tea and tea-processing machinery; Jute
textiles and jute mill machinery; sugar and sugar mill machinery. These examples can be
multiplied. The essential point is that most Indian business groups, especially the bigger ones,
are sufficiently vertically integrated in many product lines. (iii) Growth through Acquisition
There are two possible ways of expansion of a firm or a group: (a) fresh investment either by
expanding an already existing firm or establishing a new one and (b) acquiring an already
existing firm. Almost all leading business groups have grown in both ways, with the second type,
ie, growth by acquisition, being the predominant feature of Soorajmull Nagarmull, Thapar,
Bangur, Goenka and Mafatlal.
12
Acquisition of foreign 388 firms, sometimes whole managing
agencies, has been in turn the most important form of growth by acquisition.


Indian Monopolistic Behaviour: Defining Our Approach
Having identified the Indian monopolist and having considered the relevant characteristics of the
Indian business group, the question now arises: can we detect any behaviour pattern of the
monopolist in India? In attempting to build up, however tentatively, a theory of monopolistic
behaviour in Indian industry, it may be useful to consider the generality of some of the
established theories of monopolistic/oligopolistic behaviour and their relevance to India. We do
not review In its entirety the extensive literature on the subject, but only deal with its main
outlines in order to clear the ground and to emphasise our points of departure from accepted
doctrine. We consider, for the sake of illustration, two well-established groups of theories: (i) the
neo-classical theories of monopolistic/imperfect competition of Chamberlain and Joan Robinson
and (ii) the modern theories of oligopoly of Sylos-Labini and Joe S Bain.
3



3
12 On the basis of lists of companies in different managing agencies and/or business groups for differ-ent points of time
given by M M Mehta, "Combination Movement in Indian Industry", Allahabad 1952; Oxford, 1965 and A I Levkovsky,
"Capitalism in India",
Monopoly in Indian economy
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The Chamberlain
13
-Joan Robin-son
14
type of analyses marks a departure from the Marshallian
analysis of polar market forms: perfect competition on the one hand, and monopoly on the other.
However, the departure is not major, precisely because the analysis continues in the same static,
partial equilibrium, marginalist frame-work of the behaviour Qf the individual single-product
firm which knows its own demand curve given from out-side, knows the details of its U-shaped
cost curve and maximises short-run profit at MC = MR. Further, the theories limit themselves to
the determination of short-run price-output equilibrium. Hence the analysis of investment
behaviour is left out altogether.
15
Insofar as these theories introduced into the formal body of
economic analysis certain observed features of reality like falling costs, product differentiation,
advertising costs, excess capacity, etc, they no doubt contributed to the development of an under-
standing of monopolistic behaviour. However, it is by now recognised that these theories do not
in any meaningful way help to understand the dynamics of behaviour of a monopolist, even in an
advanced economy, precisely because the formalisation of the features of economic reality of the
advanced capitalist economy was either inadequately and incompletely perceived or incorrectly
construed. The generality and universality of these theories is severely questioned.
16
The
relevance and applicability of these theories would be substantially reduced once we consider
them in the context of Indian reality. In India to-day, as we have noted earlier, mono-poly capita]
is significant, 'with an overwhelmingly large portion of the capital- in the corporate private sector
centralised in the hands of some highly diversified and integrated business groups. In addition,
the context is dynamic: that of an underdeveloped economy, still in the process of growth.
17
This
characteristic together with that of the predominant roles of the State and foreign capital in the
Indian economy today would change the context quite radically. Thus theories dealing with an
individual single-product firm in an essentially static, laissez-faire framework unperturbed by
forces external to the firm would cease to have relevance, leave alone applicability. Any attempt
to test these theories in the Indian con-text (for' instance the Chamberlain hypothesis
18
about the
relationship between market structure and capacity utilisation) without accounting for the
specific features of Indian monopoly and the distinguishing characteristics of the Indian
economy, would naturally lead to inconclusive and mystifying results. The new developments on
the oligopoly front, represented by the theories of Joe S Bain and Sylos-Labini, are significant.
Unlike traditional oligopoly theory with concerns itself, by and large, with conjectural variations
in market behaviour for the existing set of firms, these theories draw attention, instead, to the
conditions of entry as the determinant of market behaviour and of equilibrium in the long run.
The theories start by rejecting the assumption of short-run profit maximisation. Instead, they
postulate that firms maximise the discounted present value of the profit accruing over the long
run, where they seek to relate the short-run price policy with its effects on entry and profits in the
long run.
4


4
13 E H Chamberlain, "The Theory of Monopolistic Competition", Cambridge (Mass), 1933.
14 Joan Robinson, "Economics of Imperfect Competition", London, 1933.
15 Joan Robinson, "Imperfect Competition, Then and Now", pp vi-viii.
16 Nicholas Kaldor, "Market Imperfections and Excess Capacity", Economica, March 1935, pp 30-50;
17 Meir Merhav, "Technologi-cal Dependence, Monopoly and Growth", Permagon Press, 1969, pp 67-71.
18 I C Sandesara, "Monopoly, Competition and Excess Capacity in Indian Industry", paper pre-sented to- the all-India
Seminar) on Monopoly and Public Policy in India, University of Bombay, March 1970
Monopoly in Indian economy
Page 17

These theories also focus on the question of potential competition as distinct from actual
competition. The 'condition of entry' is the main concept of these theories. Bain defines it to
mean the advantages of established firms over potential entrants, these advantages being
reflected in the extent to which established sellers can persistently raise their prices above a
competitive level without attracting new firms into the industry. Departures of the condition of
entry from the "zero pole" of easy entry may be attributable to one or more of the following:
absolute cost ad-vantages of established firms; product differentiation advantages of establish-ed
firms; and significant economies of large-scale firms. Of these the third is regarded as the most
important factor. These factors together determine the 'entry preventing price' which a firm
chooses over the long run. Although the Bain-Labini approach is essentially static and concerns
itself with a single-product firm, the introduction of the concept of condition of entry makes it
relevant for an-alysis of the process of investment under monopoly in the dynamic con-text of
an underdeveloped economy like India. The relevance grows when we recall that the deterrent to
entry will, according to Bain, tend to in-crease as both (a) the minimal optimal scale becomes a
larger proportion ot total industry output, and (b) the rise of unit costs becomes steeper as scale is
reduced below the minimum optimal scale. Both these factors appear to be characteristic of
Indian industry,
19
marked as it is by high techno-logical dependence and markets which are small
in relation to the size of the plants normally imported from the advanced economies. Certain
basic limitations of these theories -in the context of Indian monopoly need to be pointed out.
Firstly, in India, the most effective entry-preventing strategy for existing firms in an oligopolistic
industry seen is to be to deny a worthwhile share of the increasing demand to any potential
entrant. Given the objective of maximising potential relative shares in growing markets, non-
price instruments, and not the entry-prevailing price emphasised by Bain and Sylos- Labini,
would be central to the policies pursued by existing firms. In a situation where entry is not so
much within the influence of individual firms but is institutionally determined, as with the
industrial licensing system in India, the significance of Bain-Labinli analysis diminishes even
further. Secondly, if one considers entry to an industry by a firm engaged in a different but
related industry,
20
rather than entry by an entirely new firm as considered by Bain, the
significance of his 'barriers to entry is reduced substantially. Especially in India, where business
groups are engaged in an array of diversified lines through their constituent firms, the entry of
one such business group into an industry is not likely to be subject to the same impenetrable
'bairiers' which Bain envisages. This is so be-cause a new product may be linked technologically,
whether on the demand or the supply side, to one or the other of the group's range of existing
products and would thus lead to greater integration within the group. Both because of this and
because of its sheer size and staying power, a business group can effectively with-stand the
competitive tactics which existing firms may employ in order to prevent its entry or restrict its
potential market-share in that particular product. Thus, though the recent developments in
oligopoly theory have far greater relevance to our study than the neoclassical considered earlier,
their limitations for an understanding of monopolistic behaviour in Indian industry have to be,
nevertheless, clearly recognised.
21

5


5
19 Jack Baranson, "Manufacturing Problems in India", Popular Prakashan, Bombay, 1970.
20 Sylos-Labini partially recognises thfs phenomenon. See Sylos-La-bini, op cit p 61.
21 V K Gupta, "Cost Functions, Concen-tration, and Barriers to Entry in Twenty Nine Manufacturing In-du$tries in
India" and B V Mehta, "Economies of Scale and Concen-tration", paper presented to the all-India Seminar on Monopoly
and Public Policy in India, Uni-versity of Bombay, March 1970.
Monopoly in Indian economy
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One reason why we have rejected the above theories is that they are concerned with a single-
product firm whereas the dominant unit of mono-poly in India is the highly diversified business
group. It is evident that monopolistic behaviour with respect to price, current-output and
investment decisions of the group is likely to differ sharply from that of a single-product film.
This is because the business group is likely to pursue its objectives with regard to the group as a
whole, not ITM-individual constituents as already noted while considering the organisational
characteristics of Indian business groups - and in relation to the total national market, not
individual product markets. For example, a large diversified business group may subsidise
products in some lines or in some areas if the market is geographically segmented, as part of a
policy of loi-run profit maximisation regardless of short-run loss. The negative return on these
lines can be, covered by profits in other lines which may be facing- less active
competition
2
Similarly, the technological interdependence which is observed to characterise the
range of a group's products or the non-uniformity of its financial interest in individual companies
within the group are likely to weigh heavily on a group's decisions. These considerations are,
however, irrelevant to a single-product firm which is a unit unto itself and restricted to one
product only. Even if we consider a hypiothetical single-product firm belonging to a group, its
behaviour is likely to be quite different from another single-product firm which is independent of
any group. This is because the objectives and decisions for each unit of a group are likely to be
subsidiary to those of the group as a whole. It is observed that the business group bears some
similarity to the highly diversified but independent giant corporation which prevails in thc
Western capitalist economies "today. From this it may be suggested that existing theories of the
diversified, giant corporation, e g, that of Pen-rose of Robin Marris, may be appropriate to an
understanding of the behaviour of Indian business groups. However, it is contended here that
such theories would have limited relevance in the Indian context. There are several reasons.
First, the structural differences between Indian business groups and the giant corporations of the
advanced capitalist economies would stand out more sharply than the similarities would.
Whereas the diversified giant corporation is one indivisible financial unit, the business group is
not, consisting as it does of many firms and/ or giant corporations. The relative shareholding of
the controlling authority of the group, in all likelihood, will not be uniform as between the
different firms in his group. This may lead the controlling authority of the group to maximise the
profits of those firms where his controlling interest, in terms of shareholding, is relatively higher,
at the expense of other firms of the group. Such considerations are, how-ever, not relevant for the
diversified, giant corporation since it constitutes a single financial unit. Besides, Indian business
groups are observed to have close links with banks and other financial intermediaries, but the
giant corporations in the advanced capitalist economies today do not in general have such
linkages. Such a difference with regard to own as opposed to outside sources of finance will
obviously influence the volume and rate of investment of the respective units of decision.
Secondly, the diversified, giant corporations of the advanced capitalist economies are deemed to
be characterised by a separation of ownership from control. The dispersed share-holders are not
regarded as being in control of the decision-making of the corporation: decision-making is in the
hands of the transcendental management or techno structure. Capitalism has transformed itself
today into 'managerial' capitalism, so runs- the argument. The validity of such a cha-racterisation
has been severely questioned.

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Even if true, the relevant point to note here is that Indian business groups are far from such a
characterisation of separation of ownership from control. It has been already noted that in India
the shareholding of the controlling authority of a group in the group's constituent firms is
significant, and in the case of the Inner Circle companies there is normally majority shareholding
(i e, in excess of half the proportion of total shares). Thus theories which are built around the
concept of 'managerial' capitalism, for instance the theory of Robin Marris would cease to have
relevance in the Indian con-text. Finally, the context in which these theories are constructed is
that of the mature capitalist economy whose historical features differ sharply from that of the
Indian economy today. On all these counts, we would have grave objections to a grafting on of
existing theories of the diversified, giant corporation to the study of monopolistic behaviour in
Indian industry. Both because of the similarities in the structure of the Zaibatsu houses in post-
Meiji Japan and that of Indian business groups, and also the similarities in the two historical
contexts (A post-Meiji Japan and India today-in both the role of the State in the industrialisation
of an underdeveloped economy is significant - a theory of behaviour of the Japanese Zaibatsu, if
at all such a theory exists, would be more appropriate to a study such as ours. A discussion of
this issue would, however, have to wait and falls outside the purview of this paper. It should be
amply clear by now that the approach to monopolistic behaviour in Indian industry, and
especially attempts at constructing a theory underlying such behaviour, must base itself squarely
on the reality of today's Indian economy. Besides, the approach must base itself on such premises
about behaviour, for instance the maximising motive, which them-selves reflect the material
reality. Un-historical and/or non-materialistic approaches would thus fail to discern. the
distinguishing characteristics of monopolistic behaviour in Indian industry today.
Thus this study will attempt to emphasize (a) the highest form of capital in Indian industry today
- mono-poly capital and (b) the most representative unit of monopoly capital in India - the
business group. Such a study will, however, fail to be complete if it is not undertaken in relation
to the distinguishing characteristics of the Indian economy today. A part cannot be studied
meaningfully, in abstraction of the whole. These characteristics, as indicated earlier, are
principally three. First, India re-mains an underdeveloped economy basically still in the process
of growth. Secondly, the role of the State is significant, in terms of both direct State ownership of
the means of production and use of State economic policies for promoting and regulating private
economic activity. Thirdly, foreign capital is significant in India, quantitatively and qualitatively,
and indigenous monopoly is itself linked with it. All these characteristics require to be
appropriately accounted for in a theory of behavior of Indian monopoly.

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Important characteristics features of monopolistic competition

The concept of monopolistic competition is more realistic than perfect competition and pure
monopoly. According to Chamberlain in real economic situation both monopoly and competitive
elements are present. Chamberlains monopolistic competition is the blending of competition and
monopoly. The most distinguishing feature of monopolistic competition is that the

products of
various firms are not identical but different although they are close substitutes for each other.
Like perfect competition there are a large number of firms but unlike perfect competition the
firms produce differentiated products which are close substitutes of each other.
Under monopolistic competition there is freedom of entry and exit. Thus under monopolistic
competition it is found that both the features of competition and monopoly are present. In India,
for example, we find the monopolistic competition. In India there are a number of manufacturers
producing different brands of tooth paste viz Colgate, Pepsodent. Promise, Close-up, Prudent and
Forhans etc.
The manufacturer of Colgate has got the monopoly of producing it. Nobody can produce and sell
tooth paste with the name Colgate. But at the same time he faces competition from other
manufactures of tooth paste as their products are close substitutes of Colgate tooth paste. Thus
we find that monopolistic competition is the real market structure than either pure competition or
monopoly.
Important features of monopolistic competition

1. Existence of large number of firms:
The first important feature of monopolistic competition is that there is a large number of firms
satisfying the market demand for the product. As there are a large number of firms under
monopolistic competition, there exists stiff competition between them. These firms do not
produce perfect substitutes. But the products are close substitute for each other.
(2) Product differentiations:
The various firms under monopolistic competition bring out differentiated products which are
relatively close substitutes for each other. So their prices cannot be very much different from
each other. Various firms under monopolistic competitors compete with each other as the
products are similar and close substitutes of each other. Differentiation of the product may be
real or fancied.
Real or physical differentiation is done through differences in materials used, design, color etc.
Further differentiation of a particular product may be linked with the conditions of his sale, the
location of his shop, courteous behaviour and fair dealing etc.


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(3) Some influence over the price:
As the products are close substitutes of others any reduction of price of a commodity by a seller
will attract some customers of other products. Thus with a fall in price quantity demanded
increases. It therefore, implies that the demand curve of a firm under monopolistic competition
slopes downward and marginal revenue curve lies below it.
Thus under monopolistic competition a firm cannot fix up price but has influence over price. A
firm can sell a smaller quantity by increasing price and can sell more by reducing price. Thus
under monopolistic competition a firm has to choose a price-output combination that will
maximize price.
(4) Absence of firm's interdependence:
Under oligopoly, the firms are dependent upon each other and can't fix up price independently.
But under monopolistic competition the case is not so. Under monopolistic competition each
firm acts more or less independently. Each firm formulates its own price-output policy upon its
own demand cost.
(5) Non-price competition:
Firms under monopolistic competition incur a considerable expenditure on advertisement and
selling costs so as to win over customers. In order to promote sale firms follow definite -methods
of competing rivals other than price. Advertisement is a prominent example of non-price
competition.
The advertisement and other selling costs by a firm change the demand for his product. The rival
firms compete with each other through advertisement by which they change the consumer's
wants for their products and attract more customers.
(6) Freedom of entry and exit:
In a monopolistic competition it is easy for new firms to enter into an existing firm or to leave
the industry. Lured by the profit of the existing firms new firms enter the industry which leads to
the expansion of output. But there exists a difference.
Under perfect competition the new firms produce identical products, but under monopolistic
competition, the new firms produce only new brands of product with certain product variation. In
such a law the initial product faces competition from the existing well- established brands of
product.




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Conclusion
The monopolist is the sole producer or seller of the products. The product he produces or sells
has no close substitutes. Monopoly also implies exclusive control. In monopoly, the firm and
industry are identical. Even the remote substitutes of his product are not available. A single
producer or seller controls the market. He is the firm and he also constitutes the industry. Thus
under monopoly, the distinction between the firm and industry disappears. In monopoly, there is
no need to differentiate products. The monopolist has wide latitude of choice in his price policy.
He controls the supply and can fix the price. Monopoly is that market situation in which a firm
has the sole right over production or sale of the product. The ultimate aim of the monopolist is to
maximise profits.In indian context monopoly is there in govt. sectors mainly in railways,which
has its own pros and cons. In private sectors also i.e industrial there is monopoly of some big
industrialist.There is one concept of monopolistic competition which is more realistic than
perfect competition and pure monopoly. Under monopolistic competition there is free access of
entry and exit. Thus under monopolistic competition it is found that both the features of
competition and monopoly are present. In India, , we find the monopolistic competition in many
of the sectors.,which is good for indian economy.














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BIBLIOGRAPHY/WEBLIOGRAPHY
1. www.scribd.com
2. www.jstor.org
3. www.ssrn.com
4. www.preservearticles.com
5. Wikipedia
6. Economic and political weekly