Monopoly versus Perfect Compitition in Pakistan

Zahid Nazir - 1st Semester Autum 2008 (MBA Col) of 33

Assignment No. 2

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MONOPOLY AND PERFECT COMPITITION

INTRODUCTION

Market ; Its classification : In ordinary language, the word market

implies a particular place where the buyers and sellers assemble. In other

words, an area, large or small, can be considered as a market where buyers

and sellers are in easy contact with one another. The term thus indicates a

geographical location. In economic jargon, however, market implies a

contact either direct or indirect between buyers and sellers. Thus, market is a

network of dealings between buyers and sellers.

With the development of communications and banking, the markets

have widened and dealings in some commodities are now world-wide.

Therefore, the essential feature of a market is that buyers should be able to

strike bargains with sellers. According to Wicksteed, “Thus market is the

characteristic phenomenon of economic life and the constitution of markets

and market prices is the central problem of Economics”.

Broadly, markets may be classified on the basis of area as local,

national and world markets. But, the classification relevant for our purpose

is based on the extent of competition prevailing in the market.

Accordingly, there are perfect markets and imperfect markets. The

essential characteristic of perfect market is the prevalence of uniform price

for the commodity. On the other hand, different prices prevail for the

product in imperfect markets.

Imperfect competition may have several forms, e.g. monopoly,

duopoly, oligopoly and monopolistic competition.

Thus, markets are classified on the basis of number of sellers, nature of

the product, degrees of competition etc.


PERFECT COMPITITION

Perfect competition is said to exist when the market possesses

following characteristics or fulfils the conditions mentioned below:

a) A large Number of Buyers and Sellers : The fundamental

condition of perfect competition is that there must be a large number of

sellers or firms. The total number of sellers is so large that no individual

seller is in a position to influence the price of the product in the market. In

other words, the individual seller’s decision to raise or lower the supply will

have an insignificant effect on the market price, because each one is selling a

small portion of the total output. Therefore, Each Seller is just a Price-taker

and not a Price-Maker.

b) Homogeneous Commodity : This is the second fundamental

condition of a perfect market. The products of all firms in the industry are

homogeneous and identical. In other words, they are perfect substitutes for

one another. There are no trade marks, patents etc. to distinguish the

product of one seller from that of another. Under perfect competition, the

control over price is completely eliminated because all firms produce

homogeneous commodities. This condition ensures that the same price

prevails in the market for the same commodity.

The two basic features, viz. large number of firms and homogeneous

product make the demand perfectly elastic for an individual firm. As a result

of this, the demand curve (i.e. AR curve) facing an individual firm becomes a

horizontal straight line and MR curve coincides with AR curve.

c) Free Entry and Free Exit : Under perfect competition, there is

complete freedom of entry for new firms and of exit for the existing firms.

However, in short period, neither the new firms can enter nor the existing

firms can leave the industry.

d) Perfect Knowledge : It is necessary to assume that the producers

and consumers have full knowledge of the prevailing price. Hence, there is


no need for the sales promotion or to incur expenditure on advertisement in

respect of their preferences for commodities.

e) Perfect Mobility : There is complete mobility of the factors of

production from one firm to another, or from one industry to another or

from one occupation to another.

f) No transport costs : Another important condition of perfect

competition is that producers work sufficiently close to each other. In other

words, the differences caused by transport costs do not exist.

PURE COMPETITION AND PERFECT COMPETITION

Economists like Chamberlin and others often make a distinction

between pure competition and perfect competition. The term Pure

Competition is used in a restricted sense. It is also known as atomistic

competition. In order that competition be pure it requires the fulfillment of

three conditions of perfect competition, namely, the existence of a large

number of buyers and sellers, homogeneity of the product, and freedom of

exit and entry. These conditions together mean that no individual firm can

exert any influence over the market price.

But the term perfect competition is a wider concept, in the sense,

that it includes the features of pure competition and some additional

conditions, such as perfect knowledge on the part of buyers and sellers,

perfect mobility of factors of production and absence of transport cost.

This means that, perfect competition requires that there should

be no imperfections in the market. Such imperfections arise due to

imperfect knowledge or immobility of the factors of production.

In fact, pure competition is a part and parcel of perfect competition.

American economists prefer to use the term pure competition, while the


English economists prefer the term perfect competition. However, both the

terms are used to analyze the features of perfect markets.

PRICE DETERMINATION UNDER PERFECT COMPETITION

The forces underlying the determination of price under Perfect

Competition are Demand and Supply. The interaction of demand and

supply determines the price of a commodity in the market. Marshall has

compared the Process of price determination to the cutting of cloth with a

pair of scissors. As two blades are required to cut the cloth; so the two

blades – demand and supply – are required to determine the price in the

market, no matter one may be more active than the other and more effective

than the other, but the existence of both is indispensable.

Now, demand comes from the buyers and the supply from the sellers.

The demand from the buyers can be shown by the Market Demand Schedule

and the supply from the sellers can be shown by the Market Supply

Schedule.

Table

Demand and Supply Schedules

Price per unit of commodity

Rs.

Quantity demand per week

Units

Quantity supplied per week

Units

50 80 530

40 120 480

30 200 400

20 300 300

10 500 180

5 650 70


From the above market demand and supply schedules, it is convenient

to plot points on the graph and derive the demand and supply curves

respectively. (Fig-a.)

Y

60 D S 50 •••• •••• 40 •••• •••• 30 •••• •••• P E 20 •••• 10 •••• •••• S • • D

O 100 200 300 400 500 600 700 X

Quantity of X Demanded and Supplied Fig-a. Price Determination under Perfect Competition

DD represents the demand curve and SS the supply curve. The two curves

intersect at point E. This point of intersection is called the point of

equilibrium – because it is at point E that quantity demanded equals

quantity supplied, viz. 300 units. The possible level of price at which

QD=QS is Rs. 20/-. It is also called the equilibrium price or the market

price, because it is at this price that quantity demanded and quantity

supplied are in equilibrium.

M

Pri

ce (

Rs.

)


At pt E, Qd x= Qs x. E is the point of equilibrium between qd x and qs

x and OP is the Equilibrium Price because for OP as the price Qd x = Qs x.

Thus, the price of commodity X in the market under perfect competition is

fixed at the point of intersection of demand and supply curves

TENDENCY TOWARDS ONLY ONE PRICE

We may further note that there exits the tendency towards prevalence

of only one price for the commodity in the market under perfect

competition. (Fig-b). Let us assume that the price instead of being Rs. 20/-

is Rs. 30/-. Then when the price is Rs. 30/-, the sellers are prepared to sell

more. At Rs. 30/- as the price, supply is likely to expand to 400 units but at

the same time, demand will contract to only 200 units. Thus, supply is in

excess of demand when the price is Rs. 30/-. Sellers will compete with each

other to dispose of their stock, and this will result in lowering of the price.

Therefore, when supply is in the excess of demand, the price will start falling

from Rs. 30/- to Rs. 20/- at which point the quantity demanded will equal

quantity supplied and the original equilibrium point will be restored.

Y

60 D S 50 •••• •••• 40 •••• •••• S Exceeds D 30 •••• •••• P E 20 •••• 10 •••• •••• S • D Exceeds S • D

O 100 200 300 400 500 600 700 X

Pri

ce (

Rs.

)

Quantity of X Demanded and Supplied

(Fig-b) Prevalence of Only One price


If the price were now to go below the original price, assuming the price to be

Rs. 10/-, then at this price the buyers will demand more units of commodity

X; the new demand at price of Rs. 10/- will go up to 500 units, but the sellers

will be less prepared to sell commodity X at this low price. The supply will

shrink to only 180 units. Hence when the price falls to Rs. 10/- demand will

exceed supply and there will be competition among the buyer to buy readily

the units of commodity X because it is going cheap in the market. This

competition will lead to the pushing up of the price. Now, the price will

start rising till it becomes Rs. 20/-; and where quantity demanded and

supplied of commodity X once again become equal. This tendency towards

the prevalence of only one price is the acid test of perfect competition.

EFFECTS OF SHIFTS IN DEMAND AND SUPPLY ON THE PRICE LEVEL

Why does the price rise ? The price rises in the market because of two

theoretical conditions:

i) When demand increases i.e., when the demand curve shifts to the

right (Fig-c). Let us assumed that the original equilibrium point is E

(Fig-c) When demand curve shifts to the right


and OP is the original market price. Now when the demand increases, the

demand curves shifts to the right and new demand curve is D1D2. This curve

intersects the supply curve at point E’. Thus E’ is the new equilibrium point

and the new price is now OPi , which is higher than the original price OP,

thereby showing that price rises when demand increases. (Fig-c)

ii) When supply decreases, i.e. when the supply curve shifts to the

left. (Fig-d) Let us assume that E is the original point of equilibrium and OP

is the original price level. Now when supply decreases, the supply curve

shifts to the left and the new supply curve is S1S2. The new equilibrium

points now becomes E’ and the new price is OP’, which is higher than the

original price OP; thus when supply decreases, the price rises.

(Fig-d) When supply curve shifts to the left

When will price fall? The price will decline when :

i) The demand decreases, i.e. when the demand curve shifts to the

left. (Fig-e)

Zahid Nazir - 1st Semester Autum 2008 (MBA Col) of

33

(Fig-e) When demand curve shifts to the left.

Let us assume that E is the original point of equilibrium and OP is the original price level. Now when demand decreases the demand curve will shift to the left and D1D2 will be the new demand curve. E’ will be the new equilibrium point and the new price will be OP’ which is lower than the original price OP. Thus, when demand decreases, the price will decline. ii) The supply increases, i.e. when SS curve shifts to the right. (Fig-f)

(Fig-f) When Supply Curve shifts to the right


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Let us assume that E is the original point of equilibrium and OP is the

original price level. Now, when the supply increases, the supply curve will

shift to the right. The new supply curve will be S1S2. and the new point of

equilibrium will be E’. The new price will now be OP’ which is lower than

the previous price OP. Thus, the price will decline when supply increases.

Thus shifts in demand and supply curve will influence the price.

ROLE OF TIME ELEMENT IN THE THEORY OF PRICE (Marshallian Four Period Analysis)

Marshall assigned considerable importance to the element of time in determination of price. Depending upon the period of time, supply can adjust itself either partly or fully or not at all to the change in demand, and will in turn influence the level of price. Hence Marshall has classified time period into four categories on the basis of the degree of responsiveness of the supply to adjust itself to changing market conditions.

i) The very short period or the market period is that period of time in which the supply is fixed or is perfectly inelastic. The very short period is so short a period that supply cannot adjust itself to the change in demand, e.g. if the demand for fish, or milk, or any such commodity shoots up one fine morning, it would be difficult to increase their supply immediately to meet demand.

ii) The short period is that period in which the supply can adjust itself only partly to the change in demand; may be as a result of firms making full use of their plant capacity by varying the amounts of only variable factors. The short period is not long enough to enable the firms to expand their plant capacities.

iii) The long period refers to that period of time in which the supply can adjust itself more fully or even fully to the change in demand. The supply becomes more elastic and at times even perfectly elastic. The long period is long enough to permit new firms to enter or the existing firms to expand.

iv) The Very Long Period is that period of time for which we cannot predict with any degree of accuracy as to what will happen to forces of


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demand and supply. In fact, Keynes once said ‘in the very long period we are all dead’.

We shall therefore limit the role of time element while analyzing the

price theory to the very short, short and long periods.

Let us assume that E1 is the original point of equilibrium and OP1 is the

original price prevailing in the market. Now, one day the demand for

commodity X increases suddenly and the demand curve shifts to the right,

the new demand curve being D2D3; but in the very short period supply will

remain perfectly inelastic; shown by the Market Supply Curve (MSC); and

the new equilibrium point will be E2 and the new price will be OP2. This will

be the very short period price which is considerably above the original

market price, because the supply is perfectly inelastic. (Fig-g)

(Fig-g) The Role of Time Element in the Theory of Price

However, in the short period, supply will be able to adjust itself partly

to the change in demand, and the new supply curve will be SPS; and the


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new equilibrium will be at a point E3 and the new price will be OP3. The

price in the short period is now lower than the price in the very short

period; although it is above the original market price.

In the long period, the supply will be able to adjust itself more fully

or even fully to the change in the quantity demanded. There will thus be

two possibilities: (a) the supply curve may become more elastic and the new

supply curve will be LPS; the new equilibrium point will be E4 and the new

price will be OP4; (b) the supply may become perfectly elastic and may fully

adjust itself to the change in demand. In this case, the new supply curve

may become horizontal (LPS2), the new equilibrium point will be E2 and the

new price will become OP5, which has come back to the original price level.

Thus, depending on the period of time allowed to pass, the supply may

partly, fully or not at all adjust itself to the change in demand and will

influence the price. This analysis highlights the role of time element in

theory of price.

MONOPOLY

If a certain firm is the only one that can produce a certain good, it has a monopoly in the market for that good.

• A monopolist:

� is the sole supplier of an industry’s product

• and the only potential supplier

� is protected by some form of barrier to entry

� faces the market demand curve directly

� Unlike under perfect competition, MR is always below AR


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To understand what a monopoly is and how a monopoly operates, we'll have

to delve deeper than this. What features do monopolies have, and how do

they differ from those in oligopolies, markets with monopolistic competition

and perfectly competitive markets?

Features of a Monopoly

� When we discuss a monopoly, or oligopoly, etc. we're discussing the market for a particular type of product, such as toasters or DVD players. In the textbook case of a monopoly, there is only one firm producing the good. In a real world monopoly, such as the operating system monopoly, there is one firm that provides the overwhelming majority of sales (Microsoft), and a handful of small companies that have little or no impact on the dominant firm.

� Because there is only one firm (or essentially only one firm) in a monopoly, the monopoly's firm demand curve is identical to the market demand curve, and the monopoly firm need not consider what it's competitors are pricing at. Thus a monopolist will keep selling units so long as the extra amount he receives by selling an extra unit (the marginal revenue) is greater than the additional costs he faces in producing and selling an additional unit (the marginal cost). Thus the monopoly firm will always set their quantity at the level where marginal cost is equal to marginal revenue.

� Because of this lack of competition, monopoly firms will make an economic profit. This would normally cause other firms to enter the market. For this market to remain a monopolistic one, there must be some barrier to entry. A few common ones are:

Legal Barriers to Entry - This is a situation where a law prevents other firms from entering the market to sell a product. In the United States, only the USPS can deliver first class mail, so this would be a legal barrier to entry. In many jurisdictions alcohol can only be sold by the government run corporation, creating a legal barrier to entry in this market.

Patents - Patents are a subclass of legal barriers to entry, but they're important enough to be given their own section. A patent gives the inventor of a product a monopoly in producing and


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selling that product for a limited amount of time. Pfizer, inventors of the drug Viagra, have a patent on the drug, thus Pfizer is the only company that can produce and sell Viagra until the patent runs out. Patents are tools that governments use to promote innovation, as companies should be more willing to create new products if they know they'll have monopoly power over those products.

Natural Barriers to Entry - In these type of monopolies, other firms cannot enter the market because either the startup costs are too high, or the cost structure of the market gives an advantage to the largest firm. Most public utilities would fall into this category. Economists generally refer to these monopolies as natural monopolies.

Profit maximisation by a monopolist

� Profits are maximized where MC = MR at Q1P1

� In this position, AR is greater than AC so the firm makes profits

above the opportunity cost of capital shown by the shaded area.

� Entry barriers prevent new firms joining the industry.


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Comparing monopoly with perfect competition

a). Suppose a competitive industry is taken over by a monopolist:

� Competitive equilibrium is at A, with output Q1 and price P1.

� To the monopolist, LRSS is the LMC curve, and SRSS is the SMC curve.

� The monopolist maximises profits in the short run at MR = SMC at P2Q2.

b). Suppose a competitive industry is taken over by a monopolist:

In the long run the firm can adjust other inputs ...

to set MR = LMC at P3Q3.

• So we see that monopoly compared with perfect competition implies:


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– higher price – lower output

• Does the consumer always lose from monopoly? – Among other things, this depends on whether the monopolist

faces the same cost structure – there may be the possibility of economies of scale.

A NATURAL MONOPOLY

• This firm enjoys substantial economies of scale relative to market demand

• LAC declines right up to market demand • the largest firm always enjoys cost leadership • and comes to dominate the industry

It is a NATURAL MONOPOLY.

DISCRIMINATING MONOPOLY

• Suppose a monopolist supplies two separate groups of customers – with differing elasticities of demand


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– e.g. business travellers may be less sensitive to air fare levels than tourists.

• The monopolist may increase profits by charging higher prices to the businessmen than to tourists.

• Discrimination is more likely to be possible for goods that cannot be resold

– e.g. dental treatment.

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MONOPOLY IN PAKISTAN

Three major examples of monopoly in Pakistan are:

1). Murree Brewery Company

2). The Monopoly of Thuraya in Satellite Telecommunication in Pakistan

3). PTCL monopoly

We will discuss these one by one.

MURREE BREWERY COMPANY

HISTORY

Consequent to the British annexation of the Punjab in 1849 from Sikh rule, and more so after 1857 when the British Crown formally extended its sovereignty over India, a structured administration commenced in the Punjab.

To meet the beer requirements of British personnel (mainly army), the Murree Brewery was established in 1860 and incorporated a year later at Ghora Galli, located in the Pir Punjal range of the Western Himalayas at an elevation of 6000' above sea level, near the resort town of Murree.

Between 1885 & 1890 the Company established Breweries in Rawalpindi & Quetta & acquired an interest in the Oticumand (South India) & Norailiya (Ceylon) breweries. A distillery was also established in the above period in Rawalpindi next to the Brewery.

The Murree Brewery at Ghora Galli was therefore among the first modern beer breweries established in Asia. Murree Beer proved to be very popular among the British troopers who were largely barracked in the 'Galis' of these hills.


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The virtues of beer brewed from barley malt & hops as a light alcoholic beverage were not lost on the local population who rapidly became avid consumers.

By the turn of the 20 century, the name "Murree" was famous for its beer in keg and bottle in the bars, beer halls and army messes of British India. Murree Beer was first awarded a medal for product excellence at the Philadelphia Exhibition in 1876, followed by numerous awards over the past 140 years.

In 1935, a massive earthquake totally demolished the Quetta brewery as well as substantial part of Quetta town, killing thousands of persons, including a number of our employees. At Ghora Galli (Murree), the scarcity of water became an emerging problem. By the 1920s, brewing was mostly transferred to the Rawalpindi brewery but malting continued at Ghora Galli till the 1940s, when this property was sold. This historic brewery built in Gothic style architecture was burnt during the partition riots of 1947/48.

Park Lodge a handsome residential properly was purchased by the company from Mrs. H. Whymper in 1888. It was the principal residence and head office of the company till 1959, when it was taken over by the Government of Pakistan to house the office of the President of Pakistan. It remains an office of the Head of State of Pakistan from 1960 till the present day.

Two English families were closely connected with the founding of the original brewery. Edward Dyer was the first General Manager of the company. He was also the founder of Dyer Meaken breweries, Simla hills. Edward Whymper, a member of this family was the first person to climb Matterhorn mountain in 1865.

The Rawalpindi brewery is blessed with deep aquifers of good water. A railway siding was extended to the premises in the 19th century, which is now derelict.

Under the present prohibition law, only non-Muslims and foreigners are permitted to consume alcohol. Notwithstanding the consequent reduction in demand, the Company decided as policy to concentrate on product excellence. It was decided to modernize the plants.


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A Ziemann (German) brew house was installed in 1967, 'Saladin' Box Maltings in 1971. Also in the late sixties, it was decided to embark on an ambitious long-term program to mature Malt Whiskies. Over the past four decades white oak casks and vats have been procured from North America, Australia and Spain.

Our two underground cellars now hold over half a million liters of Malt Whisky for varying periods of maturation up to 12 years under controlled temperature conditions.

Another wave of modernization was undertaken in the 1990s. New beer canning and modern bottle filling facility from Holstein and Kappert (Germany) was installed. Two units of alcohol rectification columns for producing extra neutral grade of potable alcohol from Molasses were procured from France and Italy, respectively, to give our Vodkas and Gins a qualitative edge.

Also in this period, the beer fermentation capacities were renewed. It is pertinent to point out that our basic beer fermentation system installed in the 1930s was then at the cutting edge of this technology. Known at the time as the Nathan system, it incorporates fermentation and the lagering of beer in a single double jacketed vessel. A variation of this system is now in extensive use world wide.

The Murree Brewery is one of the oldest public companies of the sub-continent. Its shares were traded on the Calcutta Stock Exchange as early as 1902, and is now the oldest continuing industrial enterprise of Pakistan.

In 1997-1998 and 1998-1999, Murree Brewery was judged among the top 25 performing public companies by the Karachi Stock Exchange.

MURREE BREWERY CO MAINTAINS ITS MONOPOLY

Murree Brewery Co Ltd, the only licensed alcohol manufacturer in Pakistan, produces good quality beer, wine and spirits, and is making the most of its monopoly by further improving its products. The company’s brands have always created strong demand because of their flavour and low prices, factors which have hitherto discouraged the purchase of illegally imported products. Different factors enhancing its demand are


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Alcoholic drinks continues to grow

Sales of alcoholic drinks in Pakistan continued to grow during 2008 albeit at slower rates than in previous years due to increases in the prices of staple items that diverted the demand for alcohol products towards cheaper, home-made, unbranded varieties. However, the demand for wine was greater than during most of the earlier years of the review period. Other categories showed declines in volume consumption due to rising unit prices. The Government of Pakistan has become more liberal in its outlook concerning alcoholic drinks, and people are also being influenced by international media such that they are becoming more receptive to the idea of drinking alcohol. Restaurants that serve all kinds of alcoholic drinks have been opened in major cities across the country.

Increase in sales of cheap contraband alcohol products

Increases in unit prices of basic food commodities together with growing unemployment have led to a rise in the demand for cheap, locally produced alcohol which has actually killed several people in rural areas of Pakistan. This has prompted many social and government organizations to take action against producers of counterfeit alcohol.

Off-trade continues to dominate sales

Food/drink/tobacco specialists remains the primary channel for the sale of alcoholic drinks in Pakistan. On-trade sales have increased somewhat in absolute terms given the growing number of restaurants serving alcohol within Pakistan, but these will nevertheless require considerable time and government support to increase their overall share of alcoholic drinks volume sales.

Steady growth rate is forecast to continue

The forecast period is anticipated to witness steady growth in volume sales of alcoholic drinks each year, since little change is expected in the Government’s stance regarding the legal issues surrounding the sale of alcohol. Furthermore, expansion is predicted due to people’s rapidly growing adoption of Western culture. Nevertheless, sales volume growth will continue to face a challenge from the increased supply of


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cheap contraband and locally produced alcohol which is expected to remain much in demand within Pakistan.

It is also evident from their financial statements that there is rapid growth in the sales of liquors.

Balance Sheet


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Profit and Loss Account


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Cash Flow Statement


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THE MONOPOLY OF THURAYA IN SATELLITE TELECOMMUNICATION IN PAKISTAN

History

� UAE based company � Founded in 1997 in UAE � Thuraya-1 launched on 21 October, 2000. � Thuraya-2 launched on 10 June, 2003. � Thuraya-3 suppose to be launched at the end of March, 2007. � Thuraya’s Primary Gateway is in Sharjah. � Thuraya relies on Geosynchronous Orbital System

In May 2002 THURAYA products and services were launched in Pakistan. This country has a great potential for satellite telecommunications. With population of 140 million people we have a fixed line penetration of less than 3%, while 0.7% of Pakistanis use conventional mobile phones. And their coverage is in major urban cities only. THURAYA on the other hand with its remarkable satellite technology covers every inch of Pakistan in addition to 1/3 of the globe. THURAYA has aggressively launched its services in Pakistan with its offices in all major cities and with an ever-expanding dealer network. We are working towards encouraging THURAYA usage all across Pakistan i.e. in the remote valleys of NWFP, deserts of Sindh, agricultural plains of Punjab, the rugged mountains of Baluchistan and covering the oceans. But also it can be used in all major cities of Pakistan. Future is satellite communications as it works in every corner of Pakistan and is accessible to all.

Global Prospects of Thuraya

� Thuraya claims 65% of market share of satellite traffic within the area of Thuraya’s foot print.


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� In the global context, Thuraya has 26% share of the satellite market. � Major growth market of Thuraya’s business (now):

Iran, Afghanistan, Pakistan, Libya, countries of Sahara, in particular DR Congo and Angola.

Why Thuraya’s Monopoly

� No biasness from PTA. � No Political issues. � No security issues regarding allowing any other country to serve

satellite telecommunication services. � No legal and Technical reason.

But only two points or hubs located in two different locations and the fact is:

� The Two hubs or terminals were owned by PTCL and still PTCL is the owner.

� PTCL is the main Licensee. � Thuraya is the only service provider. � Any other company can set up it’s satellite telecommunication in

Pakistan, if and only has to have the above mentioned terminals.

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PERFECT COMPITITION IN PAKISTAN

One of the classical example of perfect competition in Pakistan is

Telecommunication sector. It has all the characteristics of perfect

competition like:

� A large Number of Buyers and Sellers

� Homogeneous Commodity

� Free Entry and Free Exit

� Perfect Knowledge

� Perfect Mobility

Pakistan’s Mobile Industry: On the Growth Path

The overall consensus of industry analysts is that Pakistan is one of the

countries with a huge untapped potential for telecom growth and an

attractive investment environment. Recently Business Monitor International

(BMI) ranked Pakistan as a key destination for telecom growth. The BMI

rankings take into account a number of factors including industry situation,

growth potential, competitive landscape and economy and political risks etc.

The sudden growth in subscriber base in Pakistan has caused network

congestion and service quality problems. The major operators are

responding to this problem by upgrading their networks. These multibillion

dollar improvements, along with a regulatory effort to introduce Mobile

Number Portability (MNP) next year, should maintain the stiff competition

in Pakistan mobile market.

Pakistan is still an unsaturated market and with the falling cost of

handsets there are plenty of new subscribers to compete for, especially in the

rural areas. But eventually, as in saturated markets, if mobile operators want

to avoid simply competing on price, they will have to compete on superior

service, innovative features and ease-of-use. As an example of new trends

there were so many text messages (SMS) sent on this Eid that the

networks of all 6 companies were kept extremely busy!


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Pakistan has also had some strategic

wins in the international

telecommunication scene. This

month Pakistan won the council

seat of International

Telecommunication Union (ITU)

and Chairman Pakistan

Telecommunication Authority (PTA)

was elected as member of Radio

Regulation Board of ITU. Pakistan

also holds the office of President in

Asia Pacific Telecommunity. ITU has also announced that it will setup a

Center of Excellence in Pakistan for telecommunication regulation

and policy.

There is still a long way to go for Pakistan telecom industry. Pakistan needs

to increase telecom research and development work within the country.

China and India are in the process of becoming world’s major R&D centers

for technology and telecommunication. Two top Chinese telecom

equipment firms have announced their plans to collaborate with

Pakistan: Huawei is working with UET Lahore and ZTE will setup R&D

center in Islamabad. The goal of the policy makers should be to increase

the rate of transfer of technology from abroad, broaden the pool of local

skilled workforce and accelerate the local production of telecom equipment

and handset parts etc.

At the top of the list of Pakistani mobile companies is

Mobilink, the Pakistani unit of Egypt-based telecom company

Orascom. It has been in Pakistan since 1994. With 20 million subscribers it

has the largest market share. Its shares are listed on the Egyptian and

London stock markets (OTLD).

Ufone, a wholly owned subsidiary of Pakistan

Telecommunication Co. Ltd (PTCL), is now under the control of

Etisalat group of UAE. With 8.8 million subscribers it is the runner up. For

those in Pakistan it is the one company where they can easily invest locally.


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In third place is Warid, owned by the Abu Dhabi group of the

United Arab Emirates and sister of Wateen group. With 5.9

million subscribers it controls 14% market of subscribers.

Norway Telenor, a recent entrant with about a billion US dollar

invesment in Pakistan has been doing well, based on its recent

earning report. It has about 4.6 million subscribers or 11% of the market.

Telenor stock is listed in the Oslo stock market (TEL) and Nasdaq NY

(TELN).

Paktel and Instaphone now owned by China Mobile Company

(ZONG). It has 2.7% market share.

One sign of the growth burst of the sector in Pakistan and its self-confidence

are the media ads of the various companies. As they fight for market

share, that battle is being conducted over the airwaves and newsprint.

It is hard not to notice the mobile phone advertising campaigns in Pakistan.

The mobile phone and services advertisements are in the media, on

billboards and everywhere else imaginable.

The quality and aggressiveness of the advertising campaigns indicates the

level of effort to gain market share. According to studies Pakistan has been

adding 2 million subscribers each month in 2006. The market segments

mobile companies are targeting include:

• tech-savvy youth

• business users (due to the their higher average revenue per user)

• first-time subscribers in remote and rural areas

• previously ignored segments, for instance housewives and women


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Mobile Cellular Services (as on 27 March 2009 )

CELLULAR SUBSCRIBERS

Mobilink Ufone Zong Instaphone Telenor Warid Total Growth Rate %

2000 114,272 80,221 112,000 306,493 15.39 2001 309,272 116,711 96,623 220,000 742,606 142.29 2002 800,000 350,000 218,536 330,000 1,698,536 128.73 2003 1,115,000 550,000 319,400 420,000 2,404,400 41.56 2004 3,215,989 801,160 470,021 535,738 5,022,908 108.90 2005 7,469,085 2,579,103 924,486 454,147 835,727 508,655 12,771,203 154.26 2006 17,205,555 7,487,005 1,040,503 336,696 3,573,660 4,863,138 34,506,557 170.2 2007 26,466,451 14,014,044 1,024,563 333,081 10,701,332 10,620,386 63,159,857 80.70 2008 32,032,363 18,100,440 3,950,758 351,135* 18,125,189 15,489,858 88,019,812 39.4

July-2008 32,056,336 18,368,074 4,446,024 351,135 18,329,428 15,774,299 89,325,296 1.4 Aug-2008 31,578,241 18,600,511 4,803,058 321,134 18,316,157 15,944,559 89,563,660 0.3 Sep-2008 31,359,049 18,801,402 5,092,476 321,134 18,472,445 16,157,778 90,204,284 0.7 Oct-2008 30,882,528 18,978,138 5,297,610 321,134 18,634,249 16,411,898 90,525,557 0.4 Nov-2008 30,055,187 19,100,291 5,398,823 321,134 18,875,127 16,656,589 90,407,151 -0.1 Dec-2008 28,479,600 19,301,180 5,503,274 321,134 19,387,956 16,914,054 89,907,198 -0.6 Jan-2009 28,315,076 19,414,930 5,851,858 321,134 19,657,177 17,143,722 90,703,897 0.9 Feb-2009 28,116,064 19,497,028 5,979,853 321,134 19,842,594 17,251,369 91,008,042 0.3

Note: Including AJK & NAs

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MONOPOLY

MERITS

• May be appropriate if natural monopoly • Encourages R&D

• Encourages innovation • Development of some products not likely without some

guarantee of monopoly in production • Economies of scale can be gained – consumer may benefit

DEMERITS

• Exploitation of consumer – higher prices

• Potential for supply to be limited - less choice

• Potential for inefficiency – X-inefficiency – complacency over

controls on costs

PERFECT COMPITITION

MERITS

• High degree of competition helps allocate resources to most efficient use

• Price = marginal costs

• Normal profit made in the long run

• Firms operate at maximum efficiency

• Consumers benefit


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DEMERITS

• New idea? – firm makes short term abnormal profit

• Other firms enter the industry to take advantage of abnormal profit

• Supply increases – price falls

• Long run – normal profit made

• Choice for consumer

• Price sufficient for normal profit to be made but no more!

CONCLUSION:

Adam Smith said that competitive forces function like an “invisible hand” to ensure that people pursuing individual interests simultaneously serve interest of society. Competition among economic agents would therefore narrow selfish interest of each person in a sociable desirable direction. Therefore perfect competition would lead allocative or economic efficiency. On the other hand monopolies could lead to lower cost due to economies of scale. Although in the real world it is very difficult (almost impossible) to have a pure perfect competition or monopoly, both of them, in theory, bring benefits to society. In order to evaluate whether perfect competition is a more efficient market structure than monopoly, there has to be a direct comparison between the two market structures to draw conclusions.

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Monopoly versus Perfect Compitition in Pakistan

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