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 4th 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: http://www4.economictimes.indiatimes.com/news/news-by-industry/transportation/railways/soon-tweet-or-access-e-mails-while-travelling-in-trains/articleshow/5783998.cms

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 1st AC between Bangalore to Delhi (Rs 4555) is lesser than the cost of two 1st AC 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 fromwww.irctc.co.in

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 http://www.indianrail.gov.in/international_Tourist.html

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 http://www.indianrail.gov.in

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 fromhttp://www.indianrail.gov.in

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 – Barauni – Muzaffarpur – Raxual – New Delhi (4410 Kms) | 2458 | Source: http://www.indianrail.gov.in/circular_Journey_Fares.html

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: https://www.irctc.co.in

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: http://www.indiaonestop.com/railway/dynamicpricingpolicy.htm

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: http://www.indiaonestop.com/railway/dynamicpricingpolicy.htm

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 http://www.indianrail.gov.in/tatkal_Scheme.html

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 www.irctc.co.in

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.

Monopoly

Indian railways widest reach in country
Follows following properties
1. Single seller
2. No close substitutes
3. Price maker
4. Sole manufacturer so blocks the entry

Why Monopoly ?
To maintain Government control
Consistent Revenue Generating Business
To have single Coordinating Authority
Security reasons
Contributing towards growth of the country
Providing service to remote areas
Competition from low cost airlines
Still not a threat to the monopoly of railways
Price cross subsidization
Regular service

Disadvantages Of Monopoly
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

Moving Towards Competitive Market
Entry of private players
Introduction of new technology
Improving services
Effective management
Competition from Low Cost Airlines
Possible use of waterways

Second Degree Price Discrimination: Block Pricing
Prices for single ticket
Prices for monthly pass
Prices for quarterly pass
Bulk Booking discount for seasonal trains

Third-Degree price discrimination: Consumers groups
 First class, second class, third class, sleeper, AC
 Prices are charged accordingly.

Intertemporal Pricing
Tatkal reservation

No two part tariff or peak load pricing strategies are implemented