Studyledge

Market Structures: Competition and Monopoly: Question 9

Syllabus 3.7

Multiple choice 1 mark

ParcelWay Ltd has held the exclusive licence to deliver post-office parcels across the country of Dunmoor for the past twenty years, with no rival courier permitted to compete for this business. Over the past five years, customer complaints about late deliveries have risen sharply, yet ParcelWay's delivery charge has stayed the same and the company has made no investment in newer sorting equipment.

Which of the following best explains, in economic terms, why ParcelWay Ltd might have let its delivery service decline in this way?

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

Worked solution

Step 1: Identify the market structure described

ParcelWay Ltd holds an exclusive licence, meaning it is the only courier permitted to deliver post-office parcels in Dunmoor. This is a monopoly market, with no rival couriers for dissatisfied customers to switch to.

Because customers who are unhappy with late deliveries have no rival courier to turn to instead, ParcelWay does not risk losing business by letting its service slip. Rising complaints, an unchanged delivery charge, and no investment in newer sorting equipment are all consistent with a firm facing little competitive pressure to keep improving, exactly what option A describes.

Step 3: Rule out the other options

  • Option B invents a legal requirement to cut prices every year that is not stated anywhere in the scenario.
  • Option C directly contradicts the stem: ParcelWay’s exclusive licence means, by definition, that no rival couriers exist, so competitive pressure from rivals cannot have increased.
  • Option D invents a government price control that is not mentioned, and its conclusion (“no incentive to remain in the market”) does not logically follow even if a price freeze existed.

Final answer

With no rival courier to lose customers to, ParcelWay Ltd faces little competitive pressure to invest in improving its service, which is consistent with rising complaints, an unchanged charge, and no new equipment, option A.