Managerial

Economic

“MONOPOLY”
“ SUGAR INDUSTRY OF PAKISTAN”

SUBMITTED BY :

 FAHAD BIN HAFEEZ

 Imran Tariq Awan
 Umair Javed
 Mohammad Shoaib

SUBMITTED TO :
SIR QAZI SUBHAN

CLASS : BBA- 5C
 MONOPOLY

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“MONOPOLY”
“ SUGAR INDUSTRY OF
PAKISTAN”

Monopoly

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A monopoly is a market structure in which there is only one producer/seller for a

product. In other words, the single business is the industry. Entry into such a
market is restricted due to high costs or other impediments, which may be
economic, social or political. For instance, a government can create a monopoly
over an industry that it wants to control, such as electricity. Another reason for the
barriers against entry into a monopolistic industry is that oftentimes, one entity has
the exclusive rights to a natural resource. For example, in Saudi Arabia the
government has sole control over the oil industry. A monopoly may also form
when a company has a copyright or patent that prevents others from entering the
market. Pfizer, for instance, had a patent on Viagra.

What Does Monopoly Mean?

A situation in which a single company or group owns all or nearly all of the
market for a given type of product or service. By definition, monopoly is
characterized by an absence of competition, which often results in high prices and
inferior products.

According to a strict academic definition, a monopoly is a market containing a

single firm.

Explanation:

Monopoly is the extreme case in capitalism. Most believe that, with few
exceptions, the system just doesn't work when there is only one provider of a good
or service because there is no incentive to improve it to meet the demands of
consumers. Governments attempt to prevent monopolies from arising through the
use of antitrust laws.

Of course, there are gray areas; take for example the granting of patents on new
inventions. These give, in effect, a monopoly on a product for a set period of time.
The reasoning behind patents is to give innovators some time to recoup what are
often large research and development costs. In theory, they are a way of using
monopolies to promote innovation. Another example is public monopolies set up
by governments to provide essential services. Some believe that utilities should
offer public goods and services such as water and electricity at a price that is
affordable to everyone.

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Monopolies cannot charge as much as they want, nor would they. They are still
bound by costs, and thus there is a theoretical optimum for production, if they
could charge as much as they wanted then they would, and it would be set to
infinity.

In specific cases having a monopoly provides the cheapest supply for a product.
But because of what is called "a natural monopoly" the government regulates it so
as to keep their prices as close to a purely competitive situation as possible.
So to answer your question, the importance of a natural
monopoly is to provide goods and services at the cheapest price possible. Other
monopolies probably can abuse their monopolistic power. The only reason that
natural monopolies can't is because they are regulated.
Good examples of natural monopolies -- local distribution
lines for natural gas and wires for electricity distribution. It doesn't make sense to
have 10 companies setting poles and hanging wire on them. Plus it would be
extremely ugly. So one company does it, but the company is regulated. Sometimes
governments provide Natural monopoly good and services, but that can cause
problems also. The rates become like taxes and the government has no one
regulating them.

Objectives:

The debate about monopoly will never be settled! The consensus seems to be that
the economic case for and against monopoly needs to be judged on a case by case
basis - particularly when assessing the impact on economic welfare.

The standard economic case against monopoly is that, with the same cost
structure, a monopoly supplier will produce at a lower output and charge a higher
price than a competitive industry. This leads to a net loss of economic welfare and
efficiency because price is driven above marginal cost - leading to locative
inefficiency.

The diagram below shows how price and output differ between a competitive and
a monopolistic industry. We have assumed that the cost structure for both the
competitive firm and the monopoly is the same - indeed we have assumed that
output can be supplied at a constant marginal and average cost.

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Assuming that the monopolist seeks to maximize profits and that they take the
whole of the market demand curve, then the price under monopoly will be higher
and the output lower than the competitive market equilibrium. This leads to a
deadweight loss of consumer surplus and therefore a loss of static economic
efficiency.

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CAN MONOPOLY BE DEFENDED?

Monopoly and Economies of Scale

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Because monopoly producers are often supplying goods and services on a very
large scale, they may be better placed to take advantage of economies of scale -
leading to a fall in the average total costs of production. These reductions in costs
will lead to an increase in monopoly profits but some of the gains in productive
efficiency might be passed onto consumers in the form of lower prices. The effect
of economies of scale is shown in the diagram above. Economies of scale provide
potential gains in economic welfare for both producers and consumers.

Regulation of monopoly

Because of the potential economic welfare loss arising from the exploitation of
monopoly power, the Government regulates some monopolies. Regulators can
control annual price increases and introduce fresh competition into particular
industries

Monopoly and Innovation (Research and Development)

How are the supernormal profits of monopoly used? Is consumer surplus of equal
value to producer surplus?

Are large-scale firms required to create a comparative advantage in global

markets? Some economists argue that large-scale firms are required to be
competitive in international markets.

An important issue is what happens to the monopoly profits both in the short run
and the long run. Undoubtedly some of the profits will be distributed to
shareholders as dividends. This raises questions of equity. Some low income
consumers might be exploited by the monopolist because of higher prices. And,
some of their purchasing power might be transferred via dividends to shareholders
in the higher income brackets - thus making the overall distribution of income
more unequal.

However some of the supernormal profits might be used to invest in research and
development programmes that have the potential to bring dynamic efficiency gains
to consumers in the markets. There is a continuing debate about whether
competitive or monopolistic markets provide the best environment for high levels
of research spending.

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Domestic monopoly but international competition

A firm may have substantial domestic monopoly power but face intensive
competition from overseas producers. This limits their market power and helps
keep prices down for consumers. A good example to use here would be the
domestic steel industry. Corus produces most of the steel manufactured inside the
UK but faces intensive competition from overseas steel producers.

SUGAR INDUSTRY OF PAKISTAN

Sugar industry is playing an important role in the economy of Pakistan. The
progress in technology has been made by industry itself. At the time of the
independence there were only two sugar mills one at Rahwali, Punjab and the
other at Takhat Bai, NWFP. Total quantity of sugar produced during 1947-48 was
7,932 tones. Today there are 75 sugar mills all over the country. Majority of these
sugar mills are based on sugar cane. The total crushing capacity of this industry is
approximately 3.0 million tones cane per day. However, only four mills process
beet for sugar production. Geographical distribution of these mills is given in
Table,

SERIAL AREA NO.OF MILLS PERCENTAGE

NO.

1 PUNJAB 38 50.66%

2 SINDH 30 40%

3 NWFP 6 8%

4 BALUCHISTAN 0 0

5 AZAD KASHMIR 1 1.33%

TOTAL = 75

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Nawaz Family owns "9" sugar mills and total PML(N) have "11" sugar mills. Former
minister Abbas Sarfaraz was the owner of "5" sugar mills. The total no. of sugar mills in
Sindh are 30 and mostly under the influence of Asif Ali Zardari. Other "40" sugar mills
owned by different business mans in Pakistan. List of Nawaz family sugar mills:
Abdullah Sugar Mills, Brother Sugar Mills, Channar Sugar Mills, Chaudhry Sugar Mills,
Haseeb Waqas Sugar Mills, Ittefaq Sugar Mills, Kashmir Sugar Mills, Ramzan Sugar
Mills and Yousaf Sugar Mills.

Recently Pakistan had a huge sugar crisis, from which common man has suffered a
lot. The concerned department wanted to import sugar to meet the demand of the
country but as we all know that maximum sugar mill owners are politicians, they
didn’t let the government to do its job, so that they create a sugar monopoly and
make profit. The owners created an artificial sugar crisis too and stored sugar to
create more demand. As in economics, when demand increases price of the
commodity increases. That’s what happened here. Full advantage was taken from
the artificial monopoly which was created.

Sugar Crisis in Pakistan

It is a question that in Pakistan who is the responsible for sugar crisis and inflation of
prices in Pakistan? There are three terror tries involved in it but they are blaming each
other. One is the Government who is striving to hide its Failure in Government, the
second one is the owners of Sugar Mills, who are gaining benefit from the failure of
Government, and third one are the public who are using sugar and sugar and they do open
their eyes when doctor diagnoses them sugar, and they don't know either this diagnose is
due to crisis or prices.

Sugarcane is the second largest non-food crop after cotton and ranks fifth in respect of
acreage. Prolonged drought and heat stress decreased its production by 22 per cent in
1999-2000, and further 17 per cent in 2000-01.

An Introduction to Pakistan’s Sugar Industry

Pakistan is the 5th largest country in the world in terms of area under sugar cane
cultivation, 11th by production and 60th in; yield. Sugarcane is the primary raw material
for the production of sugar. Since independence, the area under cultivation has increased
more rapidly than any other major crop. It is one of the major crops in Pakistan
cultivated over an area of around one million hectares.

The sugar industry in Pakistan is the 2nd largest agro based industry comprising 81 sugar
mills with annual crushing capacity of over 6.1 million tones. Sugarcane farming and
sugar manufacturing contribute significantly to the national exchequer in the form of
various taxes and levies. Sugar manufacturing and its by-products have contributed
significantly towards the foreign exchange resources through import substitution.

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Key Facts

Crushing Capacity 6.1 Million tones

Contribution to Economy 3.0 – 4.0 Million Tones

- Share in GDP 1.9%
- Employment 1.5 million (directly & indirectly)
- Total Investment PKR 100 Billion (Approx)

Average Yield per Hector 46.8 Tones

Total Cane Production 45.0 – 55.0 Million Tones

Cane Available 30-43 Million Tones

Average recovery of sugar 9.1 (vs. world avg. 10.6%)

Per Capita Consumption 25.8 Kg Per capita

Contribution to exchequer Rs.12.16 Billion

SUGARCANE

Sugarcane, an important cash crop, is grown on over a million hectares and

provides the raw material for Pakistan’s 78 sugar mills Sugarcane production is
cyclic as farmers and industry continues to work at odds. Industry procurement
practices such as delaying the crushing season, buying cane at less than the
support price, short weight, false deductions and delayed payments reduce returns
to farmers. Sugar millers complain that farmers grow unapproved varieties with
low sucrose content, thus resulting in lower sugar production.

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Area (‘000' hectares) Production (‘000' MT)

Province 2006/07 2007/08 2008/09 2006/07 2007/08 2008/09

Punjab 712.00 805.00 725.00 37,542 42,453 38,335

Sindh 215.00 240.00 215.00 12,529 13,950 12,550

NWFP 106.00 115.00 105.00 4,800 5,100 4,500

Baluch 0.0 0.00 0.00 0.0 0.0 0.0

Total 1033.00 1160.00 1045.00 54,871 61,503 55,385

Indicative Prices of Sugarcane by Province

(Rs. per 40 kg/ Rs. 61= 1USD)

YEAR PUNJAB SINDH NWFP BALUCHISTAN

2000-01 35.00 36.00 35.00 36.00
2001-02 42.00 43.00 42.00 43.00
2002-03 40.00 43.00 42.00 43.00
2003-04 40.00 41.00 42.00 43.00
2004-05 40.00 43.00 42.00 43.00
2005-06 45.00 58.00 48.00 -
2006-07 60.00 67.00 48.00 -
2007-08 60.00 67.00 65.00 -
2008-09 60.00 67.00 65.00 -

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Sugar Production, Imports and Exports

(Figures in Thousand Metric Tons)

Fiscal Year (FY) Production Imports Exports

2002 3,676 83 32
2003 4,020 114 116
2004 3,115 267 54
2005 2,988 1,527 61
2006 3,519 565 47
2007 4,163 110 12

Refined Sugar production, Supply and Demand

COUNTRY PAKISTAN
COMODITY Sugar, Centrifugal (UOM 1000 MT)
2007 2008 2009
Revised Estimate Forecast

USDA Post Post USDA Post Post USDA Post Post

OFFICIA Estimate Estimate OFFICIA Estimate Estimate OFFICIA Estimate Estimate
L New L New L New

Market Year 10/2006 10/2006 10/2007 10/2007 10/2008 10/2008

Begin
Beginning 1260 1260 1260 1060 1060 1060 1010 0 1163
Stocks
Beet Sugar 15 15 15 20 20 20 0 0 20
Production
Cane Sugar 3600 3600 3600 3700 3700 4143 0 0 3650
Production
Total Sugar 3615 3615 3615 3720 3720 4163 0 0 3670
Production
Raw Imports 0 0 0 0 0 0 0 0 0
Refined Imp. 200 200 200 400 400 110 0 0 550
(Raw Val)
Total Imports 200 200 200 400 400 110 0 0 0
Total Supply 5075 5075 5075 5180 5180 5333 1010 0 5383
Raw Exports 65 65 65 0 0 0 0 0 0
Refined Exp. 0 0 0 70 70 70 0 0 70
(Raw Val)
Total Exports 65 65 65 70 70 70 0 0 70
Human Dom. 3950 3950 3950 4100 4100 4100 0 0 4200
Cons.
Other 0 0 0 0 0 0 0 0 0
Disappearance
Total Use 3950 3950 3950 4100 4100 4100 0 0 4270
Ending Stocks 1060 1060 1060 1010 1010 1163 0 0 1113
Total 5075 5075 5075 5180 5180 5333 0 0 0
Distribution

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SIGNIFICANCE OF THE SUBJECT

In this report we have discussed about the monopoly and how monopoly is created
to increase demand and ultimately increase the price. We have also given the
number of sugar mills in Pakistan, to whom it belongs and how they have created
an artificial sugar crisis and earned huge profits.

LITERATURE REVIEW

There is a kind of Monopoly in the sugar industries of Pakistan, which leads to

higher prices, less supply of sugar to the market and decreased level of consumption.
Since the beginning of the current year and even at the end of last quarter of the last
year, the international sugar prices have been on the increase. Global sugar markets have
entered a period of radical structural change. When there is a shortage of sugar in the
market then demand for the sugar increase and supply is short therefore prices of the
sugar increase in the market and there is also no substituted good with reasonable price
for the consumer.

In 1933, in the midst of what G.L.S. Shackle (1967) was to call “the years of high
theory, ”Joan Robinson (1933) and Edward Chamberlain (1933) published their
monograph son imperfect competition and monopolistic competition respectively. The
feature of monopoly, however, which has received attention throughout the ages is the
role which it plays in the exchange of goods. . . . In retrospect it is evident, in fact, that
the market aspect of monopoly is its fundamental aspect. Exclusive privileges, collusion,
unity of action, etc., are only various methods of obtaining a particular market situation
necessarily relative to time and place. . . . The nature of monopoly is inextricably tied
with that of the market itself. . . . It is in the act of exchange that the phenomenon of
monopoly makes its presence felt.... In an economic sense monopoly does not exist until
competition is restrained among actual traders. . . . A significant thing about monopoly is
that it has meaning only when considered with regard to the market place—the center of
economic activity.

. Pakistan in Asia, third-largest user of sugar and the world's fifth largest
producer of sugar cane, the Pakistan Sugar Mills Assocation. The output of sugar as well
as the production of sugarcane increased at an average rate 23.7 percent and 11.71
percent. But the increased output could not meet the demand because there is increase in
the demand of the sugar and there is also increase in the export during the regime of
Gen® Pervaiz Mushraf. Although consumption is dependent on various factors. Because
of uncertainty in the political setup of the country the government fail to develop a
certain and a clear policy regarding sugar crisis for the future. Cuba, India and Thailand
have had series of droughts which resulted in scarcity of sugar. There is no way a natural
calamity could be predicted or pre-empted but all these countries have well-defined
policies.

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For Mund (1933, p. 117), then, “the thing that identifies true monopoly is the
exercise of monopoly power.” And this, in turn, consists in the ability to regulate either
market supply or market price so as to maximize profit. In most cases, according to our
author, the monopolist manipulates price and then adjusts production according to his
experience and judgment regarding what quantities of his product buyers will take at
various prices. Mund (1933, p. 119) identified four factors that the monopolist considers
in exercising this type of power: elasticity of demand for his product; his costs of
production; his interest in future business; and the attitude of the courts and public toward
monopoly.

Pakistan is the one the biggest country in the world regarding population
including a reasonable numbers of foreigners. Pakistan is a country with a population of
about 170 million inhabitants, which includes about 6 million immigrants (3.5 million
Afghan refugees, 2 million illegal Bangladeshis, ¼ million illegal other nationalities).
Sugar is consumed in each and every beverage of Pakistan which includes soft drinks,
tea, cold drinks (sherbets, lassi), tea, kehva etc. Sugar is also used in sweetmeats, bakery
products, other confectionary items and pharmaceutical industry, etc. The important
question to be asked is at what price is sugar affordable to the general public, at what cost
are the sugar millers producing the sugar per Kg, what is the international bench mark of
producing sugar per Kg, and how far is Pakistan away from it. To keep our consumers
happy and our sugar millers satisfied what kind of investment is required and what type
of government policy is needed to develop to improve our processes and savings so that
we can reap the benefits in the future. The sugar industry is the second largest industry of
Pakistan accounting for 8% of the total value added in the large scale manufacturing
industries and contributing Rs 15-20 billion per annum in the shape of general sales tax
(GST), federal, provincial and local taxes.

F. Zeuthen, the Danish mathematical economist who published a path breaking

work on monopoly, duopoly and oligopoly in 1930, also found the marginal method to be
analytically inferior to total and average analysis._ The convenience with which the
marginal analysis allows one to identify the point of monopoly equilibrium is only
apparent, argued Zeuthen (1955, p. 230), because “in reality the trouble has only been
shifted on to the construction of the marginal curves, which the theoretical descriptions
generally take as a starting-point.” The marginal method is actually convenient merely
“in such practical cases where only a certain minor change in the decisions is
contemplated, and only the cost of the change itself is known.” In illustrating the
calculations underlying the decision about, e.g., what size plant to be built, “the total
method is employed rather than the marginal method,” while “the average method has the
advantage that the effects of altered sales and altered price are seen clearly by
themselves.”

Menger (1976, p. 211) had argued that monopoly price formation was strictly
governed by the general law of exchange: “Not only does the general principle of all
economic exchanges of goods, according to which both parties must derive an economic
advantage from an exchange, maintain its validity nimpaired in the case of monopoly,

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the monopolist is not completely unrestricted in influencing the course of economic

events.” Also see Menger 1976, pp. 213-14.

DATA AND MATHADOLOGIES

VARIABLES

Consumption:
Due to recent cartelization the mill owners have stored the
sugar in there stores which resulted in less supply of the commodity and increase
in demand and it resulted the increase in prices. Due to increase in prices the
consumption level has decreased.

Prices of substitute goods:

In our country the substitute for sugar is “brown
sugar”. People diverted themselves towards this when the prices of sugar
increased.

Price
Price of the commodity i-e sugar has increased and it affects the
purchasing power of a person, so he will purchase less.

Income
Income of a common man is increasing but the prices are increasing
with greater proportion not as with income ratio.

Taste
In Pakistan sugar is used more rather we can say that 99% Pakistan uses
sugar so everyone has a taste of it. So taste in this commodity doesn’t matter as a
variable.

Weather

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Weather has a little effect on its demand. In winters the demand of

sugar increases because people tend to eat “halwa”, “panjiri” etc they also take
more tea in winter. So one can say weather has an effect on the demand of sugar.

Import
The government is likely to import 300,000 tonnes of raw sugar later this
year as the next sugar crop will provide considerably less of the sweetener than annual
consumption of over 4 million tones. So the money would be paid in dollars and it
depends on the value of dollar that what would be the price of sugar.

PRICES OF SUGAR OF LAST 7 YEARS

YEAR/MONT 2003 2004 2005 2006 2007 2008 2009

H
JANUARY 19.83 18.53 24.35 29.49 31.55 26.06 39.38
FEBRUARY 20.14 18.16 27.00 35.05 30.83 25.73 42.63
MARCH 19.97 17.86 26.33 35.61 30.63 25.44 44.79
APRIL 19.83 18.52 26.27 36.77 30.25 25.18 -
MAY 19.71 19.10 26.15 36.32 29.85 28.45 -
JUNE 19.52 19.26 26.46 34.91 28.38 29.75 -
JULY 19.26 19.49 28.06 35.06 29.20 31.68 -
AUGUST 19.16 20.62 27.85 34.98 30.17 32.7 -
SEPTEMBER 19.79 20.75 26.65 33.43 29.85 33.44 -
OCTOBER 19.93 20.78 26.71 32.87 29.36 37.62 -
NOVEMBER 19.49 21.62 27.50 33.15 28.75 37.72 -
DECEMBER 19.17 21.52 28.47 3.0.86 26.89 35.59 -
AVERAGE 19.65 19.68 26.82 34.08 29.64 30.8 42.27
$0.33 $0.33 $0.45 $0.57 $0.49 $0.38 $0.53

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Data

Years Price Production

2005 RS.26.82 2988MT

2006 Rs.34.08 3519MT

2007 RS.29.64 4163MT

2008 Rs.30.8 3720MT

2009 Rs.42.27 3670MT

Method
Using E-View Software
OLS (Ordinary least square Method)

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Empirical Result and Calculation

Dependent Variable: PRODUCTION
Method: Least Squares
Date: 01/12/02 Time: 21:27
Sample: 2005 2009
Included observations: 5
Variable Coefficien Std. Error t-Statistic Prob.
t
PRICE -2.071370 49.49560 -0.041850 0.9704
YEARS 260.8211 185.8788 1.403179 0.2957
C -519689.6 371869.2 -1.397506 0.2971
R-squared 0.672365 Mean dependent var 3710.60

Adjusted R-squared 0.344729 S.D. dependent var 492.006

S.E. of regression 398.2733 Akaike info criterion 15.0958

Sum squared resid 317243.3 Schwarz criterion 14.8615

Log likelihood -34.73966 F-statistic 2.05217

Durbin-Watson stat 2.381797 Prob(F-statistic) 0.32763

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Conclusion

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REFERENCES

1. http://answers.yahoo.com/question/index?qid=20070414084959AAfillO
2. http://www.investopedia.com/terms/m/monopoly.asp
3. http://www.paktechsearch.com/focus.asp
4. USDA Foreign Agricultural Service ,GAIN Report (GAIN Report Number:
PK8016)
5. http://www.nation.com.pk/pakistan-news-newspaper-daily-english-
online/Business/13-Aug-2009/Govt-eyes-300000-tons-raw-sugar-import
6. Sugar crisis continues in Pakistan
Pakistan Times Federal Bureau Jan 6-2010

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7. Zeuthen, F. 1930. Problems of Monopoly and Economic Warfare. London:

George Routledge & Sons, Ltd.

8. Mund, Vernon A. 1933. Monopoly: A Theory and History. Princeton, NJ:

Princeton University Press.

9. Schackle, G .L.S. 1967. The Years of High Theory: Invention and Tradition
in Economic
Thought 1926-1939. New York: Cambridge University Press.

10.Chamberlain, Edward. 1950. The Theory of Monopolistic Competition: A Re-

orientation
of the Theory of Value. 6__ ed. Cambridge, MA: Harvard University Press.

11.Robinson, Joan. 1969. The Economics of Imperfect Competition. 2__ ed. New
York: St
Martin’s Press

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