Economics Project

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

MANAGERIAL ECONOMICS

MONOPOLY

“MONOPOLY”“ SUGAR INDUSTRY OF PAKISTAN”

Monopoly


MONOPOLY

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.


http://www.investopedia.com/terms/m/monopoly.asp

MONOPOLY

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.


MONOPOLY

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.


MONOPOLY

CAN MONOPOLY BE DEFENDED?

Monopoly and Economies of Scale


MONOPOLY

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.


MONOPOLY

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 NO.

AREA NO.OF MILLS PERCENTAGE

1 PUNJAB 38 50.66%

2 SINDH 30 40%

3 NWFP 6 8%

4 BALUCHISTAN 0 0

5 AZAD KASHMIR 1 1.33%

TOTAL = 75MANAGERIAL ECONOMICS

MONOPOLY

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.


MONOPOLY

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.


MONOPOLY

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 BALUCHISTAN2000-01 35.00 36.00 35.00 36.002001-02 42.00 43.00 42.00 43.002002-03 40.00 43.00 42.00 43.002003-04 40.00 41.00 42.00 43.002004-05 40.00 43.00 42.00 43.002005-06 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 -


MONOPOLY

Sugar Production, Imports and Exports(Figures in Thousand Metric Tons)

Fiscal Year (FY) Production Imports Exports2002 3,676 83 322003 4,020 114 1162004 3,115 267 542005 2,988 1,527 612006 3,519 565 472007 4,163 110 12

Refined Sugar production, Supply and Demand

COUNTRY PAKISTAN COMODITY Sugar, Centrifugal (UOM 1000 MT)

2007 Revised

2008 Estimate

2009 Forecast

USDAOFFICIAL

PostEstimate

PostEstimateNew

USDAOFFICIAL

PostEstimate

PostEstimateNew

USDAOFFICIAL

PostEstimate

PostEstimateNew

Market Year Begin

10/2006 10/2006 10/2007 10/2007 10/2008 10/2008Beginning Stocks

1260 1260 1260 1060 1060 1060 1010 0 1163Beet Sugar Production

15 15 15 20 20 20 0 0 20Cane Sugar Production

3600 3600 3600 3700 3700 4143 0 0 3650Total Sugar Production

3615 3615 3615 3720 3720 4163 0 0 3670Raw Imports 0 0 0 0 0 0 0 0 0Refined Imp.(Raw Val)

200 200 200 400 400 110 0 0 550Total Imports 200 200 200 400 400 110 0 0 0Total Supply 5075 5075 5075 5180 5180 5333 1010 0 5383Raw Exports 65 65 65 0 0 0 0 0 0Refined Exp.(Raw Val)

0 0 0 70 70 70 0 0 70Total Exports 65 65 65 70 70 70 0 0 70Human Dom. Cons.

3950 3950 3950 4100 4100 4100 0 0 4200Other Disappearance

0 0 0 0 0 0 0 0 0Total Use 3950 3950 3950 4100 4100 4100 0 0 4270Ending Stocks 1060 1060 1060 1010 1010 1163 0 0 1113Total Distribution

5075 5075 5075 5180 5180 5333 0 0 0


MONOPOLY

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.


MONOPOLY

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,


MONOPOLY

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


MONOPOLY

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/MONTH 2003 2004 2005 2006 2007 2008 2009JANUARY 19.83 18.53 24.35 29.49 31.55 26.06 39.38FEBRUARY 20.14 18.16 27.00 35.05 30.83 25.73 42.63MARCH 19.97 17.86 26.33 35.61 30.63 25.44 44.79APRIL 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

$0.3319.68$0.33

26.82$0.45

34.08$0.57

29.64$0.49

30.8$0.38

42.27$0.53


MONOPOLY

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)


MONOPOLY

Empirical Result and Calculation


Dependent Variable: PRODUCTIONMethod: Least SquaresDate: 01/12/02 Time: 21:27Sample: 2005 2009Included observations: 5

Variable Coefficient

Std. Error t-Statistic Prob.

PRICE -2.071370 49.49560 -0.041850 0.9704YEARS 260.8211 185.8788 1.403179 0.2957

C -519689.6 371869.2 -1.397506 0.2971R-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

MONOPOLY

Conclusion


MONOPOLY

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-import6. Sugar crisis continues in Pakistan

Pakistan Times Federal Bureau Jan 6-2010

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 EconomicThought 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


http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/13-Aug-2009/Govt-eyes-300000-tons-raw-sugar-import

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/13-Aug-2009/Govt-eyes-300000-tons-raw-sugar-import

http://www.paktechsearch.com/focus.asp

http://www.investopedia.com/terms/m/monopoly.asp

http://answers.yahoo.com/question/index?qid=20070414084959AAfillO

MONOPOLY


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