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Market Structures: Competition and Monopoly: Question 4

Syllabus 3.7

Multiple choice 1 mark

Kestrel Freight is a delivery firm operating along a busy shipping lane once served by nine competing freight companies. Last year, all nine companies merged into a single business, Kestrel Freight, which now handles every consignment travelling along that lane.

Which of the following is most likely to happen now that Kestrel Freight faces no rival firm on this lane?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Identify what has changed about this market

Before the merger, nine separate companies competed for the same freight business on this lane, which would have disciplined how much each could charge and pushed them to maintain service standards to keep customers. After the merger, Kestrel Freight is the only firm left. There are no rival companies for customers to switch to if they are unhappy with price or service.

Step 2: Work out the likely effect of having no rival firm

With no competitor on the lane, Kestrel Freight is no longer constrained by the threat of losing business to a rival. It can restrict how much freight capacity it makes available and charge higher delivery rates than any of the nine firms could have charged while competing against each other, this matches option B.

Step 3: Rule out the other options

  • Option A is incorrect: cutting prices to win “market share” only makes sense when there are rival firms whose customers you are trying to attract. Since Kestrel Freight already carries every consignment on the lane, there is no one left to win over by cutting prices further.
  • Option C is incorrect: it is exactly the disappearance of rival firms that removes the competitive pressure which previously constrained prices and quality. Assuming “nothing changes” ignores this.
  • Option D is incorrect: facing no rival firm typically raises profit, both because prices can rise and because the firm no longer needs to spend as much competing for customers, the opposite of automatically earning less.

Final answer

Losing all of its rival firms removes the competitive pressure that previously limited prices and protected service quality on this lane, so Kestrel Freight can now restrict capacity and charge higher rates than a competitive market would allow, option B.