Market Structures: Competition and Monopoly: Question 5

Worked solution

Part (a): What made the market competitive before the merger

Before the merger, the Oakhaven–Dunmore route showed clear characteristics of a competitive market:

• Several independent firms, six companies, competed for the same passengers on the same route.
• Each company set its own fare, within a range of $2.20 to $2.80, and some competed by offering onboard extras such as free wifi or air conditioning, rather than all charging an identical price for an identical service.

Part (b): Effect of the merger on fares

When six companies competed, no single one could raise its fare far above the $2.20–$2.80 range without losing passengers to a cheaper rival. Now that RegionaLink is the only operator, passengers travelling between Oakhaven and Dunmore have no alternative bus company to switch to if fares rise. With this competitive discipline removed, RegionaLink is likely to raise fares above the levels that prevailed when six firms were competing for the same passengers.

Part (c): Effect on choice and quality of service

Previously, passengers could choose between six companies’ timetables and onboard offerings, and each company had an incentive to keep its service appealing to avoid losing custom to a rival. With RegionaLink now the sole operator, passengers lose this variety of choice. There is only one timetable and one set of onboard extras to choose from, decided entirely by RegionaLink. Because no rival firm can attract dissatisfied passengers away from RegionaLink, it also has less incentive to maintain or improve service quality than the six competing companies previously had.

Part (d): Discussion, better off or worse off?

Possible benefit: Running a single combined network instead of six overlapping ones could allow RegionaLink to cut its overall operating costs, for example by avoiding duplicated routes or under-full buses. In principle, some of these cost savings, or some of RegionaLink’s higher profit, could be reinvested in newer vehicles or additional services on the route.

Possible drawback: Passengers now have no rival operator to switch to, which removes the pressure that previously kept fares within the $2.20–$2.80 range and encouraged companies to compete on service quality. This makes it likely that fares will rise and that the choice and quality of service passengers previously enjoyed will fall.

Conclusion: Weighing these against each other, the drawback is more directly supported by the evidence in the scenario: passengers on this specific route have no alternative operator to turn to if RegionaLink raises fares or lowers service quality, whereas any cost-saving benefit depends only on RegionaLink choosing to pass savings on rather than simply keeping the extra profit. On balance, passengers travelling between Oakhaven and Dunmore are more likely to be worse off as a result of the merger.

Final answers

• (a) Six independent companies competed on the same route, each setting its own fare ($2.20–$2.80) and competing on service extras.
• (b) Fares are likely to rise, since RegionaLink no longer faces a rival operator disciplining its prices.
• (c) Choice of timetable/extras and pressure to maintain quality are both likely to fall with only one operator left.
• (d) On balance, passengers are more likely to be worse off, since the loss of any rival operator outweighs the uncertain chance of cost savings being passed on.