Railway In UK Essay

Submitted By amrmuru
Words: 1799
Pages: 8

Amr Osman
John Cruickshank
5 March y
Railway Industry in the UK

Table of Contents
Market Structure and Concentration
Economies of Scale and Natural Monopoly
Public Interest
Barriers of Entry

This essay will attempt to consider to what extent the UK railway industry is a natural monopoly by applying the basic theory of natural monopoly on this case study. It will discuss the concentration ratio of the industry, economy of scale, competition in the industry, public interest, profits, barriers to entry and possible alternatives to the current market structure.

The railway industry is one of the largest and one of the fastest growing markets in the UK. Britain's railways are vital to the country's economy. More people and more goods than ever move by train today – train journeys increased by more than 50% between 2003 and 2013 and the railways carry 17% more cargo than in 2001. Over 1.5 billion travellers used trains In 2012 – an increase of 8% which is almost 24,000 trains in a day. (Orr.gov.uk, 2014)

Throughout the essay the main source for information is the worldwide internet including websites such as the department of transport, ATOC and ONS. The information off the internet is used to be able to apply the concept of natural monopoly to the railway industry using statistics and general facts about the market structure. A variety of economic books was used for accurate definitions of economic terms and explanations of economic theory relating to barriers of entry, market structure, economies of scale and natural monopoly.

Market Structure and Concentration ratio
The different types of market structure can be summarised in the table below:
Type of market structure
Number of Businesses
Freedom of entry
Nature of Product
Price Controls perfect competition
Very Many
Open, unrestricted
Elastic, driven by buyer monopoly One
Closed, unrestricted
Inelastic, firm control
Monopolistic competition
Open, unrestricted
Relatively elastic
Limited, restricted
Relatively inelastic

The UK railway industry can be considered to be a monopoly as network rail (public company) provides the infrastructure needed for the railway services. However there are many providers for the railway service, which gives rise to market concentration as there is more than one supplier in the market. In 2003, the top five businesses produced 40% of the market output and the top fifteen businesses provided 81% of the total output (Mahajan, 2005). In contrast, in 2004, the top five businesses produced 41% of the market output and the top fifteen businesses produced 88% of the output (Mahajan, 2006). As the timespan for the information is limited, the conclusions that can be made are restricted. However we can see that the top five businesses almost stayed the same whereas the output of the top fifteen businesses increased by 7% in one year. This suggests that the top five businesses are dominating the market and the top fifteen are increasing productivity. As you can see from the pie chart above, the market is dominated by eight main firms. First group has the highest market concentration at 25.1% of train kilometres operated in 2009/10.

Economies of Scale and Natural Monopoly
Minimum efficient scale (MES) is the lowest level of output where each of the economies of sale are utilised. A firm’s MES is the point where no more economies of scales can be attained, it is the point where the firm can function efficiently and competitively in a market. If MES is attained when output is significantly elevated relative to the complete market, it is probable that a small amount of companies will have the ability to be competitive in the market. This is what happens in a natural monopoly.
This graph shows the long run average cost where point A is the minimum