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Intermodal market between integrated monopoly and perfect competition

September 27, 2011

In some markets, the intermodal transport is controlled by monopolies, which integrate other monopolies that, in their turn, control intermodal facilities or even certain market segments. In terms of intermodal market, the Mi monopolies are in fact companies of an integrated monopoly M. For example, such an intermodal transport monopoly M consists in a major railway transport operator M1 who controls a company M2, the latter having the exclusivity of operating the network of terminals (the similitude with reality is purely accidental). Starting from the model of an industry with two monopolists (Stancu S., Andrei T. (1997) Microeconomie, teorie si aplicatii, Editura ALL), let’s admit the following inverse function of demand in the relation of integrated monopoly with the market: p2(y2) = a – by2 .

Among the members of the integrated monopoly there are no relations based on demand – supply rules. The company M2 overtakes a number y1 of intermodal loading units from M1 and delivers y2 = k. y1 units to the market (to road distributors or to final consumers). The overtaking cost of the product from the first company is included in the cost supported by the second company.

Comparing both situations in the following figures one can see the effects of the integrated monopoly over the consumers: the market controlled by an integrated monopoly and the market with a perfect competition. Both the monopoly M in the first situation and any operator from the second situation maximize their own profit by equalizing the marginal cost with the marginal income.

In the monopoly-controlled market it results a higher price as compared to the marginal cost:

p – Cm(Y) = -Y.  > 0, because   < 0

In the perfect market, the resulting price is equal to the price obtained by the operator (because the marginal income is equal to the price obtained by the operator who is not able to modify the price by his own):

p – Cm(yi) = 0

which shows why the consumer pays less compared to the monopoly situation.

It is true that such a monopoly, which is similar to a natural monopoly, could be influenced by some regulations or it could be replaced with the administration of the respective services by the public sector, but this way it may introduce the inefficiency into the system. Thus, it remains the alternative of services production and distribution under market conditions by deregulating and dividing the monopoly within a process of its privatisation.

Therefore, it results the need to continue the business process reengineering and to further enhance the intermodal market competition.

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3 Comments
    • The advantages of economy of scale, the reduced transaction costs etc, are important indeed. But the market must be contestable. The market competition with free entry/exit of the service providers, business oriented actors, could guarantee for quality of services. And do not forget which is the reason for the existence of anti-trust law.

      • Quality is undermined by lack of competition. Therefore you look for lack of competition to call a market monopolistic, and not the number or size of firms. When there is no pressure on prices and quality there is no competion.

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