MONOPLY

A monopoly is a market structure in which there is a single supplier of a product.

Monopolies exist because of barriers to entry into a market that prevent
competition.

The
 monopoly firm (monopolist):
 May be small or large.
 Must be the only supplier of the product.
 Sells a product for which there are only close substitutes.

TYPES OF MONOPLY
There are several types of monopoly:

Natural monopoly: A monopoly that arises from economies of scale.

The economies of scale arise from natural supply and demand
conditions, and not from government actions.

Local monopoly: a monopoly that exists in a limited geographic area.

Regulated monopoly: a monopoly firm whose behavior is overseen by a
government entity.

Monopoly power: market power, the power to set prices.

Monopolization: an attempt by a firm to dominate a market or
become a monopoly.

Natural Monopoly
A natural monopoly occurs when the most efficient number of firms in the industry
is one.
A natural monopoly will typically have very high fixed costs meaning that it
impractical to have more than one firm producing the good.
An example of a natural monopoly is tap water. It makes sense to have just one
company providing a network of water pipes and sewers because there are very
high capital costs involved in setting up a national network of pipes and sewage
systems. To have two different companies offering water wouldn’t make sense as
the average cost would be very high compared to just one firm and one network.
 There would also be the inconvenience of having two firms dig up the road to lay a
duplicate set of water pipes.
Definition of Natural Monopoly
William Baumol (1977) stated a natural monopoly is
“[a]n industry in which multiform production is more costly than production by
a monopoly”

Diagram of Natural monopoly

 Suppose the industry demand is 10,000 units.

 If a firm produces 10,000 units, it will get the lowest possible average costs – £9.
 If there were three firms producing 3,000 units. The firms would have average
costs of £17.
 Therefore, the optimal number of firms in the industry will be one (one firm
producing all 10,000 units)

Examples of Natural Monopolies

 Gas network
 Electricity grid
 Railway infrastructure

Examples of potential natural monopolies

 Airplane manufacture – At the moment, this is a duopoly so it is not a natural
monopoly, but it is close. There are very high fixed costs associated with airplane
manufacturing, but with global industry, two main producers can be supported.
 Digital platforms. In some cities, a product like Uber becomes ubiquitous for that
segment of private taxi hire via an app. The fixed costs are not particularly high,
but the dominant firm benefits from network economies, improved information,
lower average prices and
 Bus services in one particular region. – The most logical number of bus
companies within a town is one. There are high fixed costs, but more importantly
issues of practicality. Even on a busy route between two towns, it might be
inefficient to have two bus companies competing over the same route and offering
the same peak and off-peak services. One company can avoid:
 Duplication of services
 Congestion at peak times
 Too much supply at off-peak times

However, some cities do have multiple bus services. On the one hand this is more
competition, but on the other hand, there is duplication.
Note: In buying gas for domestic use, there is competition. There are several
companies who use the one national network. Therefore, gas is a natural monopoly
at the distribution stage, but at the retail stage, it is possible to have competition.

Regulation of Natural Monopolies

Natural monopolies are uncontestable and firms have no real competition.
Therefore, without government intervention, they could abuse their market power
and set higher prices. Therefore, natural monopolies often need government
regulation. For example, NEPRA and OGRA regulate the water and energy
markets respectively.
The government may wish to regulate monopolies to protect the interests of
consumers. For example, monopolies have the market power to set prices higher
than in competitive markets. The government can regulate monopolies through
price capping, yardstick competition and preventing the growth of monopoly
power.
 Why the Government Regulates Monopolies
1. Prevent excess prices. Without government regulation, monopolies could put
prices above the competitive equilibrium. This would lead to allocative
inefficiency and a decline in consumer welfare.
2. Quality of service. If a firm has a monopoly over the provision of a particular
service, it may have little incentive to offer a good quality service. Government
regulation can ensure the firm meets minimum standards of service.
3. Monopsony power. A firm with monopoly selling power may also be in a position
to exploit monopsony buying power. For example, supermarkets may use their
dominant market position to squeeze profit margins of farmers.
4. Promote competition. In some industries, it is possible to encourage competition,
and therefore there will be less need for government regulation.
5. Natural Monopolies. Some industries are natural monopolies – due to high
economies of scale, the most efficient number of firms is one. Therefore, we
cannot encourage competition, and it is essential to regulate the firm to prevent the
abuse of monopoly power.

Government Regulates Authority

 OGRA – Oil & Gas Regularity Authority
 NEPRA – National Electric Power Regularity Authority
 Sui Southern Gas Company
The Sui Southern Gas Company (SSGC) (Formerly Sui Gas
Transmission Company Limited) was formed in 1955. The company in its
present shape was formed on March 30, 1989, following a series of mergers
of three pioneering companies, namely Sui Gas Transmission Company
Limited, Karachi Gas Company Limited and Indus Gas Company Limited

Sui Southern Gas Company (SSGC) is a Public Listed Large Scale Company
(LSC) and is a Pakistan’s leading integrated gas Company. The Government of
Pakistan directly and indirectly owns the majority of the shareholding of Company.
The company is engaged in the business of transmission and distribution of natural
gas besides installation of high pressure transmission and low pressure distribution
systems.

SSGCL transmission system extends in the Provinces of Balochistan and Sindh

comprising over 3,614 KM of high pressure pipeline ranging from 12″ – 42″ in
diameter. The distribution activities covering over 1200 towns in the Sindh and
Balochistan are managed through its regional offices. About 384,979 million cubic
feet (MMCF) gas was sold in FY 2015-2016 to around 2.8 million industrial,
commercial and domestic consumers in these regions through a distribution
network of over 44,761 Km. The company also owns and operates the only gas
meter manufacturing plant in the country, having an annual production capacity of
356,000 meters on single shift basis.

Tariff SSGC
“The main aim of tariff restructuring is to support the poor consumers as the
current tariff structure lacks any balance,” he said.

He said 78 per cent of all domestic consumers fell under lifeline rates of 68 paisa
mcf, out of four slabs of tariff. “SSGC is collecting customer data these days to
help out the government in rationalizing the tariff structure,” he added. He did not
give the exact date as to when the new plan will come into force.

On SSGC privatization, he said the government and the Asian Development Bank
had appointed PriceWaterhouseCoopers as its consultant to evaluate and determine
the restructuring of the transmission and distribution sector of the gas industry. The
consultant has submitted its report and the government is studying it. The
government holds 70.43 per cent of share in SSGC followed by 13.66 per cent by
the financial institutions, 8.70 per cent by insurance companies, 4.30 per cent by
individuals and 2.31 per cent by joint stock companies and others.
The company intends to sell more gas up to 300 mmcfd to Wapda and KESC’s Bin
Qasim power plants by March 2003, from the existing 200 mmcfd of gas which
will help in reducing the import bill of furnace oil, he said.

On future development plans, he said the company had undertaken gas

infrastructure rehabilitation and expansion project under which the SSGC’s gas
transmission and distribution capacity would increase by about 50 per cent by mid-
2003. Some of the projects include Bhit Bajara Pipeline and SSGC is looking
forward to receive gas supply from its operators in January, 2003. Supply of gas
from Bhit is estimated at 270 mmcfd. The project of augmentation of North
Karachi (ACPL) and Bin Qasim Spur Line has been completed. Sawan Gas Field
integration, operated by OMV, is targeted by March 2003 and gas supply is
expected from July 2003. SSGC will receive 170 mmcfd of gas in its distribution
system from Sawan. The compressors relocation to Hyderabad will be completed
by June.

Giving a breakup on country’s gas demand, he said total gas demand would surge
to 3.7 billion cubic per day by 2005 from 2.7 bcfd in 2000, rising to 4.2 bcfd by
2010 and to 4.6 bcfd by 2015. He added that power sectors consume bulk of gas
supplies out of total gas demand. The demand for gas projections for power sector
is 1.8 bcfd for 2005, rising to 2.0 bcfd by 2010 and to 2.2 bcfd by 2015.

If a demand and supply gap is taken, he said, the gas demand in 2005 would reach
to 3.7 bcfd from 2.7 bcfd in 2000, but there would be a gap of 0.6 bcfd as supply
will be 3.1 bcfd by 2005.

He said Pakistan’s estimated life of gas reserves at current production level was 25
years. Current gas reserves stand at 22.7 trillion cubic feet and the production is
0.900 trillion cubic feet a year.
SSGC’s profit before tax in 2001-02 rose to Rs2,154 million as compared to
Rs1,975 million, up by nine per cent. The company’s gas sales volume increased
from 206,967 mmcfd to 234,553 mmcfd, showing a rise of 13 per cent and gas
sales value increased from Rs25.4 billion to Rs32.2 billion. The number of
consumers increased from 1,569,380 to 1,611,973. SSGC’s staff strength is 5,107.
Gas Rate SSGC
I. DOMESTIC SECTOR:
a. Standalone Meters
b. Mosques, churches, temples, madrassas, other Religious Places and Hostels attached thereto;

Sale Price: Rs /MMBTU

Up to 100 M3 per month: All off-takes at a flat rate of 110.00

Up to 300 M3 per month: All off-takes at a flat rate of 220.00

Over 300 M3 per month: All off-takes at a flat rate of 300.00

Minimum Charges: Rs. 148.50 per month

Government and Semi-Government Offices, Hospitals, Clinics, Maternity Homes, Government Guest Houses, Arm
Universities, Colleges, Schools and Private Educational Institutions, Orphanages and other Charitable Institutions
Residential Colonies to whom gas is supplied through bulk meters including Captive Power.

Sale price:
All off-takes at flat rate of Rs 600.00 per MMBTU
Minimum Charges: Rs. 3,600.07 per month

II. Commercial:
All establishments registered as commercial units with local authorities or dealing in consumer items for direct commercial sale like cafes, bakeries, m
shops, laundries, hotels, malls, places of entertainment like cinemas, clubs, theaters and private offices, corporate firms etc.

Sale Price: All off-takes at a flat rate of Rs. 700.00 per MMBTU
Minimum charges: Rs. 4,200.07 per month
III. Special Commercial (Roti Tandoors)

Sale Price: Rs / MMBTU

Up to 100 M3 per month: All off-takes at a flat rate of 110.00
Up to 300 M3 per month: All off-takes at a flat rate of 220.00
Over 300 M3 per month: All off-takes at a flat rate of 700.00
Minimum charges: Rs. 148.50 per month

I. INDUSTRIAL
All consumers engaged in the processing of industrial raw material into value added finished products irrespective of the volume of g
but excluding such industries for which a separate rate has been prescribed.

Sale Price: All off-takes at a flat rate of Rs. 600.00 per MMBTU

Minimum charges: Rs. 20,232.00 per month

II. COMPRESSED NATURAL GAS (CNG):

Sale Price: All off-takes at flat rate of Rs. 700.00 per MMBTU

Minimum charges: Rs. 23,604.00 per month

III. CEMENT:

Sale Price: All off-takes at flat rate of Rs. 750.00 per MMBTU

Minimum charges: Rs. 25,290.00 per month

IV. ICE FACTORIES:

Sale Price: All off-takes at flat rate of Rs. 700.00 per MMBTU

Minimum charges: Rs. 4,200.07 per month

V. CAPTIVE POWER:

Sale Price: All off-takes at a flat rate ofRs. 600.00 per MMBTU

Minimum charges: Rs. 20,232.00 per month

VI. FERTILIZER COMPANIES:

Fauji Fertilizer Bin Qasim Limited:

Sales Price: All off-takes at a flat rate of

(a) Rs. 123.00 per MMBTU for gas used as feed-stock.

(b) Rs. 600.00 per MMBTU for gas used as fuel for generation of electricity, steam and for usage of housing colonies.

VII. POWER STATIONS (WAPDA and KESC’s Power Stations)

WAPDA’s and KESC’s Power Stations and other electricity utility companies.

Sales Price: All off-takes at a flat rate of Rs. 400.00 per MMBTU

Minimum Charges: Rs. 13,488.00 per month

VIII. INDEPENDENT POWER PRODUCERS:

Sale Price: All off-takes at a flat rate ofRs. 400.00 per MMBTU

Minimum charges: Rs. 13,488.00 per month