Nguyen Thi Lan Huong – International Economics

TABLE OF CONTENTS
INTRODUCTION ......................................................................................................... 2
CONTENT ................................................................................................................... 3
1. Some basic information about Monopoly situations in Vietnam ............................... 3
2. Research on Monopoly ......................................................................................................... 3
2.1 Definition of Monopoly................................................................................................. 3
2.2 Reasons why monopolies arise ................................................................................... 4
2.2.1 Cost of production ................................................................................................. 4
2.2.2 Government regulation........................................................................................ 5
2.2.3 Trend of merging large companies .................................................................... 5
2.2.4 Underdeveloped condition of the market......................................................... 6
2.2.5 The resources ........................................................................................................ 7
2.3 Monopoly’s profit maximization ............................................................................... 7
2.4 The Deadweight loss due to the inefficiency of Monopoly ................................... 8
2.5 Control and Regulation of Monopoly ........................................................................ 9
2.5.1 Control of Monopoly through legislation ......................................................... 9
2.5.2 Control of Monopoly through price regulation ............................................... 9
2.5.3 Control of Monopoly through taxation ........................................................... 10
3. Monopoly on petrol in Vietnam’s market ...................................................................... 10
3.1 Facts about petrol trading business in Vietnam.................................................. 10
3.2 Price determination of petrol ................................................................................... 12
3.3 Impacts of the price of petrol on the government, firm and customers .......... 12
3.3.1 Bad effects/ Disadvantages ............................................................................... 12
3.3.2 Benefits of monopoly on petrol ......................................................................... 13
CONCLUSION AND SUGGESTIONS ....................................................................... 14
1. Conclusion ............................................................................................................................ 14
2. Solutions ............................................................................................................................... 14
REFERENCES ........................................................................................................... 15

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 Nguyen Thi Lan Huong – International Economics

INTRODUCTION

Currently, the research of Vietnam’s economy is largely based on studying behaviors,

relationships among businesses, economists, consumers and the government.

Economics is the study of how society manages its scarce resources to produce goods
and distribute them to the members of the society. Economics focuses on the behavior and
interactions of economic agents and how economies work. Consistent with this focus,
primary textbooks often distinguish between microeconomics and macroeconomics.
Microeconomics examines the behavior of basic elements in the economy, including
individual agents and markets, their interactions, and the outcomes of interactions.
Individual agents may include, for example, households, firms, buyers, and sellers.

For economic development, the economists must grasp the structure of the market to
make right decisions, predict the prospects for each economic sector in particular and for
the economy in general. In this economy, there is a special type of market with its own and
unique characteristics - Monopoly.

In this essay, I will not only do a thorough research on the instincts and
characteristics of Monopoly but also investigate about Monopoly on petrol in Vietnam’s
market.

Gasoline is considered to be one of essential energy sources for each nation. However,
this is a non-renewable resource. Therefore, how should we utilize this type of energy
source to maximize the profits in the business? And how will shifting from state Monopoly
on petrol to enterprises’ Monopoly affect the producers and consumers? Does the price
adjustment, made by business companies or organizations with the government’s
management, operate properly? To answer all these enquiries and figure out how to strike a
balance between the benefits of the government, the business and the consumers, I have
decided to choose the topic: “Characteristics of Monopoly and Monopoly on petrol in
Vietnam’s market” to become my essay topic of Microeconomics.

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CONTENT

1. Some basic information about Monopoly situations in Vietnam

Monopolies in business will mostly create some consequences to the market. It can
lead to the escalation in the price, limit the customers’ choices and hence, affect their
benefits. In almost every country in the world, there exist two types of Monopoly:
government-created monopolies and natural monopolies. In Vietnam, due to low starting
point in the business and some specific characteristics of Vietnam’s economy and society,
many monopolies still remain unchanged today. However, the government is trying their
best to fully complete the law system and minimize bad effects that Monopoly causes, as
well as figure out the solutions to this problem.

The government changes the market mechanism for the better by officially accepting
economic sectors, and simultaneously confirms the equality between them in the law.
Nevertheless, in practice, these rules are not followed as they expected. In fact, the
government offers a part of state enterprise (government-owned corporation) a lot of
advantages, privileges and priorities over others. Furthermore, the government even makes
use of their power to prevent other businesses and companies from partaking in these
fields, and at the same time, and quite deeply gets involved in their activities. Therefore, it
may partly contribute to today’s situation of Monopoly.

2. Research on Monopoly

2.1 Definition of Monopoly

According to Wikipedia, A Monopoly exists when a specific person or enterprise is the

only supplier of a particular commodity (this contrasts with a monopsony which relates to a
single entity's control of a market to purchase a good or service, and with oligopoly which
consists of a few sellers dominating a market. Monopolies are thus characterized by a lack
of economic competition to produce the good or service, a lack of viable substitute goods,
and the possibility of a high Monopoly price well above the seller's marginal cost that leads
to a high Monopoly profit.

At present, regarding the competitiveness, the market can be divided into 4 types:
perfect competition, Monopoly, monopolistic market, and oligopoly. Among 4 aboved-
mentioned types, Monopoly is the most special and unique market. Monopoly is the form of
market organization in which there is a firm that is the sole seller of a product without
close substitutes. Any information of Monopoly is confidential. The quantity and price of
goods and services is decided by the Monopoly firms. However, participating in or
withdrawing from the market proves to be difficult because of high barriers to entry,
including: Monopoly resources, government regulation, and production process.

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The cross elasticity of demand with every other product is very low. This means that
no other firms produce a similar product. The demand curve for his product is, therefore,
relatively stable and slopes downward to the right, given the tastes, incomes and
expectation of his customers. He is a price-maker who can set the price to his maximum
advantage. However, it does not mean that he can set both price and output. He just can do
either of the two things. His price is determined by his demand curve, once he selects his
output level. Or, once he sets the price for his product, his output is determined by what
consumers will take at that price. In any situation, the ultimate aim of the monopolist is to
have maximum profits.

2.2 Reasons why monopolies arise

2.2.1 Cost of production

Typically, Monopoly appears in the sectors with economies of scale. In these sectors,
the average cost curve (AC) decreases as the quantity of output is getting higher. The large-
scale enterprises produce goods and services with much lower cost of production than other
organizations thanks to their experience and economies of scale, etc. Hencem these kinds of
businesses are capable of eliminating others out of the market by reducing prices (but still
can mak profits), gradually having the Monopoly on the products.

Figure 1: Cost of production and quantity in the sector with economies of scale
Source: Google

Looking at Figure 1, a large-scale enterprise will produce at output QA,

corresponding to the average cost of ACA, lower than other firms. Enterprises can reduce
the price to the point ACA to exclude smaller businesses out of the market. For example, a
small-scale enterprise production output level QB, which would cost the average ACB, is
relatively high. This firm will incur losses when the price falls below the ACB and will
leave the industry in the long term. As large enterprises have succeeded in eliminating all
the other businesses out of the market, they will set up their Monopoly position in the
market.

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2.2.2 Government regulation

Legal protection of intellectual properties and inventions: Patent protecton laws are
one of the main reasons why monopolies arise because the government allows only one
manufacturer to produce the goods that they have newly invented or created, and hence,
they become a Monopoly. Take Microsoft Windows as a clear case in point. Previously,
Microsoft is legally allowed by the US government to become a Monopoly on producing and
selling Windows operating system for a fixed periof of time. On this basis, Microsoft
continues to develop new products and, thus, maintain its Monopoly. The purpose of
copyright protection is making new inventions and products much more profitable and
therefore, stimulating people to study, discover and create more inventions for the
advancement of science and society.

Figure 2: Microsoft – a Monopoly allowed by the US government

Source: https://www.microsoft.com/en-us/windows/

The government also legislate the law to protect the economic sectors that affect the
national security. For instance, public utility industries such as electricity, water,
telecommunications, radio stations, TV, etc will be protected exclusively by the state
because they play an important role to the national security. These industries often have
average cost of production decreasing as the quantity increases. Therefore, the government
declares that the average cost of production will continue getting lower when the quantity
increses and it will reach its lowest level in this sector if being organized as a Monopoly.

On the other hand, the Monopoly may be established by political reasons, such as the
radio industry, television or air in several countries. In our country-Vietnam, perhaps there
is still no business which can gain a Monopoly by way of competition but thanks to the
administrative decisions.

2.2.3 Trend of merging large companies

In the world, there appears a trend of merging large companies and corporations due
to the following reasons:
The pressure of finding new customers: Merging and cooperating will help expand the
market shares for each company. The company, after this deal, will take advantage of the
available distribution network of their own and all the companies in the alliance to improve

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its market share and dominate the market. Therefore, the merger could create favorable
conditions for businesses to form a Monopoly position.

Reduction of the cost of production: The merger will expand the existing market or
even help each other join in new markets, so it can increase the scale of production for each
enterprise. This could create economies of scale in the production process. Therefore, the
merger can help businesses make use of human resources (labor), money (capital), raw
materials, etc more effectively.

As a result, these large companies can easily create a Monopoly position on a type of
product for themselves. In fact, there are reported to be many incidents that prove the
merging of big enterprises to become popular these days. To specify:

The most influential merging

that ever occurred is when a Telecom
Company (Italia) agreed to merge
with Deutsche Telekom Company
(Germany). This deal worth $82
billion and created the world’s second
largest telecommunication
conglomerate with the capital of 200
billion dollars (The Wall Street
Journal - By GAUTAM NAIK - April
22, 1999).

Figure 3: Merger of TELECOM (Italia)

and T Deutsche Telekom (Germany)

What’s more, Huyndai agreed to buy LG Semicon: Huyndai – a conglomerate in South

Korea agreed to pay 2.15 trillion USD to buy the company which specializes in producing
electronic circuits. This agreement created the second largest electronic circuits’
manufacturer and producer in the world (Saigon Economic Times 29/04/1999, page 9).
There are also many similar cases such as: Exxon bought Mobil at a price of $73 billion, 555
bought Dunhill, Bank of Mitsubishi merged with Bank of Tokyo to become the world’s
largest banks, etc.

2.2.4 Underdeveloped condition of the market

The underdevelopment of the market may lead to the infrequency in the circulation of
goods and services. Therefore, any producers or suppliers which have the better capability
to supply goods than others will become a Monopoly in that market. This is a type of
localized Monopoly and just occurs on a small scale. Such monopolies usually exist in
remote, underdeveloped areas or far-away islands, etc.

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2.2.5 The resources

Any corporations, organizations, companies or even nations have the legal rights to
utilize a specific type of resouces in an area will have a Monopoly. By way of illustration,
South Africa possesses a large diamond mine which comprises most of quantity of diamond
in the world. Hence, this country has a Monopoly on the world’s diamond market.

2.3 Monopoly’s profit maximization

In economics, profit maximization is the short run or long run process by which a firm
determines the price and output level that returns the greatest profit. A firm maximizes
profit by operating where marginal revenue equal marginal costs. A change in fixed costs
has no effect on the profit maximizing output or price. The firm merely treats short term
fixed costs as sunk costs and continues to operate as before.

The profit maximization issue can also be approached from the input side. That is,
what is the profit maximizing usage of the variable input? To maximize profit the firm
should increase usage of the input "up to the point where the input's marginal revenue
product equals its marginal costs". So mathematically the profit maximizing rule is MRPL
= MCL, where the subscript L refers to the commonly assumed variable input, labor.

The marginal revenue product is the change in total revenue per unit change in the
variable input. That is MRPL = ∆TR/∆L. MRPL is the product of marginal revenue and the
marginal product of labor or MRPL = MR x MPL. (Wikipedia)

Profit

Figure 4: Monopoly with positive economic profits

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Output Price TR MR TC MC ATC Profit

0 36 0 ___ 47 ___ -47
1 33 33 33 48 1 48.00 -15
2 30 60 27 50 2 25.00 10
3 27 81 21 54 4 18.00 27
4 24 96 15 62 8 15.50 34
5 21 105 9 78 16 15.60 27
6 18 108 3 102 24 17.00 6
7 15 105 -3 142 40 20.29 -37
8 12 96 -9 196 56 24.75 -102
9 9 81 -15 278 80 30.89 -197

Table 1: A Monopoly’s Price, total revenue, marginal revenue,

total cosst, marginal revenue, average total cost and profit
Source: Wikipedia

In order to determine the profit maximizing level of output, the monopolist will need
to supplement its information about market demand and prices with data on its costs of
production for different levels of output.

As an example of the costs that a monopolist might face, consider the data in Table 1.
The first two columns of Table represent the market demand schedule that the monopolist
faces. As the price falls, the market's demand for output increases. The third column
reports the total revenue that the monopolist receives from each different level of output.
The fourth column reports the monopolist's marginal revenue that is just the change in
total revenue per 1 unit change of output. The fifth column reports the monopolist's total
cost of providing 0 to 5 units of output. The sixth and seventh columns report the
monopolist's average total costs and marginal costs per unit of output. The eighth column
reports the monopolist's profits, which is the difference between total revenue and total cost
at each level of output.

Profit = TR – TC = (P – ATC) x Q

From the table and graph, we can figure out:

If MR > MC, the monopolist gains profit by increasing output.
If MR < MC, the monopolist gains profit by decreasing output.
If MC = MR, the monopolist is maximizing profit. The monopolist will charge the maximum
price consumers are willing to pay for that quantity. The monopoly firm will not set the
price arbitrarily high, if the profit-maximizing price still corresponds to the point where
MR=MC. The monopoly firm’s market power will allow the firm to achieve above-normal
profits.

2.4 The Deadweight loss due to the inefficiency of Monopoly

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When a monopolist charges a price above marginal cost, some potential customers
value the good at more than its marginal cost bet less than the monopolist’s pricce. These
customers decided not to buy the good. Thus, monopoly pricing prevents some mutually
beneficial trades from taking place and the quantity produced, sold by a monopoly is below
the socially efficient level.

Figure 5: The inefficiency of Monopoly

The inefficiency of monopoly can be measured with a deadweight loss triangle, as

illustrated in Figure 5. It is the reduction in economic well-being that results from the
monopoly’s use of market power.

2.5 Control and Regulation of Monopoly

According to Economicsdiscussion.net, there are 3 ways to control Monopoly.

2.5.1 Control of Monopoly through legislation

Government tries to control monopoly by anti-monopoly laws and restrictive trade

practices legislation.These measures tend to: remove restrictive trade practices and fixation
of high prices; reduce the incidence of market-sharing agreements; remove unfair
competition; restrict the control of very large share of the market; prevent unfair price
discrimination; restrict mergers in order to avoid market domination; and prohibit
exclusive agreements between the producer and retailer to the detriment of other traders.

2.5.2 Control of Monopoly through price regulation

To regulate monopoly, the government imposes price ceiling so that monopoly price
should be near or equal to competitive price.This is done when the government appoints a

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regulating authority or commission which fixes a price for the monopoly product below the
monopoly price, thereby increasing output and lowering the price for the consumer.

2.5.3 Control of Monopoly through taxation

The tax may be levied lump-sum without any regard to the output of the monopolist.
Or, it may be proportional to the output, the amount of tax rising with the increase in
output.

Figure 6: Lump-sum tax on Moonopoly

A Lump-sum tax on Monopoly is treated as a fixed cost (FC) and therefore will only
affect average total cost (ATC). ATC curve will shift up. A higher ATC means higher costs
and thus lowers profits or increases losses. Comsumer surplus, price, quantity and
deadweight loss (DWL) will remained unchanged.

3. Monopoly on petrol in Vietnam’s market

3.1 Facts about petrol trading business in Vietnam

Gasoline or petrol is one of important sources of fuel in people’s lives. It can be used
for production and comsumption. It is an essential input in every process of production.
Therefore, carefully regulating the conditions for trading gasoline has become a
controversial issue with everyone. The government has already legislated the law to control
business activities in this sector.

According to the Decree 55/2007/ND-CP on April 6th 2007 about trading petrol and its
conditions for business, the price of petrol will be applied in the market mechanism, which
means traders or sellers who export and import gasoline and manufacturers can decide the
price after paying taxes for the government as provided in the regulations.

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There are reported to have about 11 state companies or corporations that are legally
allowed to sell imported petrol at local markets with nearly 12000 gas stations. To specify,
there are 6000 Petrolimex gas stations (more than 1800 stations with 100% of the
company’s capital, over 4000 cooperating and receiving the quantity of gasoline from main
company). According to Article 11, Competition Law, a firm is considered to have a
monopoly if it has a market share of over 30% in a related market. Article 9 also notes that
any agreements that restrict the competition (stated at Section 1, 2, 3, 4, 5 – Article 8,
Competion Law) when parties in the agreement have a market share of oer 30% in a
related market. Comprising a share of more than 60%, Petrolimex can easily protect its
monopoly position in the national gasoline market.

Figure 7: Petrolimex – Monopoly on petrol in Vietnam

It is said that petrol is a sensitive good and the advocacy of promoting the monopoly
on this type of good so that the gasoline market can operate in the market mechanism has
been widely supported. Nevertheless, there are still some preservation about whether the
customer’s benefits are guaranteed if the firm is allowed to set their own price or how to
prevent the situation of changing from state monopoly into natural monopoly.

The main reason for this controversy lies in the fact that Petrolimex accounts for over
60% of the market share. Because any products of petrol are uniform, other gasoline
distributors all follow the price that Petrolimex set (if they set higher prices, they lose their
customers, or if they set lower prices, they can hardly get profits). In Petrolimex’s stance,
having the market power, they can easily increase the price fast, and slowly decrease the
price (obviously, other firms will follow). Ultimately, this situation destroys competitive
market and reduces customer’s welfares.

When the competitive discipline is not applied, the government can intervene with
regulatory measures to ensure the economic efficiency and customer’s benefits. To clarify,
the government regulates the price range, the quality of services, how to enter or withdraw
from the petrol market. The purpose of regulating the price is to regulate the relationship
among the government, firms and customers. In terms of regulating the quality of services,
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the most important things are ensure the safety of the product, selling the product at the
right price and quantity. Regarding the regulations of entering and withdrawing from the
market, the government needs to boost competitiveness in the market by allowing more
importation and simultaneously, reduce the monopoly in distributing gasoline.

3.2 Price determination of petrol

The firm will actively set the price according to the market mechanism - which ensure
that petrol will be sold at the right price, including costs of imports, taxation, cost of
production and trading, and profits – and will be responsible for their business activities
(the government will not cover the losses).

Any trading agreements will be signed one month or quarter before its validity,
depening on the business capability of the firm. Orientation price will be created at the
beginning based on costs of imports and then register the price with petroleum monitoring
group of Finance and Trading Minitry. If accepted, this price will be kept permanently for
all year.

Product Unit Region 1 Region 2

(including GTGT tax)
Petrol RON 95 Dong/litter 16.730 17.060
Petrol RON 92 Dong/litter 16.030 16.350
Biology Petrol E5 Dong/litter 15.330 15.630
RON 92
Diezen 0,05S Dong/litter 11.110 11.330
Diezen 0,25S Stop circulating since 01/01/2016 (according to Decisions 412/TTg-
KTN 24/03/2015 of Prime Minister)
Kerosense Dong/litter 10.270 10.470
Mazut No2B (3,0S) Dong/kg 7.910 8.060
Mazut No2B (3,5S) Dong/kg 7.540 7.690
Mazut No3 (380) Dong/kg 7.440 7.580
The above-mentioned price is the retailing price, except for Mazut is the wholesale price

Table 2: The price of petrol in Vietnam (2016)

Source: fs.petrolimex.com.vn

3.3 Impacts of the price of petrol on the government, firm and customers

3.3.1 Bad effects/ Disadvantages

In terms of the government: Regarding budget revenues and expenditures, the

government has to both decrease the importation tax and cover losses for the firm.

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Regarding macroeconomics management to prevent inflation, to balance the expenditures

and revenues also requires a lot of resouces such as labor, intelectual, time, as well as
money.

In terms of the firm: If the price of petrol in the world escalates, the firms will have to
import petrol with high price but cannot substantially increase the price in local market as
it will put a serious pressure on civilians’s lives. Hence, they have to sell at standard price
and suffer losses even with the help of the government.

In terms of customers: How would they feel if with the same amount of money but
after every month, the quantity of petrol they can buy is getting smaller and smaller?
Especially, the goods with increasing price are necessity goods.

3.3.2 Benefits of monopoly on petrol

These days, there are 11 state-governed firms which can directly import petrol,
including Petrolimex with 60% of the market share. Remaing at the second level is
PetroVietnam with two affiliates PDC and Petechim; closely followed by Petec and Saigon
Petrol (Dantri – online newspaper – 01/04/2016). 4 big firms are accounting for about 90%
of the petrol market share. Thus, they do not need to compete by increasing or decreaseing
prices but negotiating with each other to create a general price in the market. The profits
they receive are megabucks.

On the other hand, when facing the escalation of petrol price in the world, they have
to suffer losses but part of losses the government has alreadly covered. And when the price
of petrol in the world falls, they still keep the old price or just reduce a little bit, hence, will
get big profits.

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CONCLUSION AND SUGGESTIONS

1. Conclusion

There is well-documented evidence to summarize that monopoly on petrol is a

suboptimal market structure. The operation of monopoly makes the market inefficient,
resources not be distributed properly, and creates deadweight loss. Most of benefits fall on
the monopoly’s hands.

The firms that have the monopoly on petrol in Vietnam exist and advance due to the
history because they not only run their business but also ensure energy storage for the
nation. Although monopolies on petrol have some positive effects on the development of our
country like large-scale production, concentration of investments, security for national
energy sources, etc, its shortcoming and consequences are undeniable, particularly the
increasing price of input as factors of production.

2. Solutions

- The government need to differientiate between trading petrol and store petrol as a
security for energy sources
- The government need to create the ceiling price and flooring price for the petrol
more clearly for each group and sector
- The government increase the economic sanction and supervision over monopoly on
petrol
- Boost the process of free trade on petrol market; create a competitive environment
for firms.
- Lead other ministry to audit the accounts, the budget revenues and expenditure
of the firms.

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REFERENCES

Economics (David Begg)

Principles of Microeconomics (N. Gregory Mankiw) – Monopoly, Page 299.

Public Economics (Joseph E.Stiglitz)

Wikipedia (https://en.wikipedia.org)

Vietnam Tax Consultants Association (VTCA)

Petrolimex (fs.petrolimex.com.vn)

The Wall Street Journal - By GAUTAM NAIK - April 22, 1999

Saigon Economic Times 29/04/1999

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