Following mergers that raised the market shares of two airlines to 79 and 82 percent, respectively, of traffic in their hub cities, prices of service rose and the quantities of service fell, even though in most other markets prices fell and quantities increased.The result suggests that these markets
A)were contestable.
B)were monopolized.
C)become more competitive due to oligopolistic rivalries.
D)had no barriers to entry.

Question

Quizplus · Accepted Answer

The rise in prices and fall in quantities after the mergers suggest that the markets were monopolized, as the two airlines had a combined market share of 79 and 82 percent. This indicates that the airlines had significant market power to raise prices and reduce service without fear of losing customers to competitors. If the markets were contestable or had no barriers to entry, other airlines would have entered and competed with the merged airlines, resulting in lower prices and increased quantities of service. The fact that prices fell and quantities increased in most other markets further supports the idea of monopolization in the hub cities. The option C, suggesting oligopolistic rivalries, is not supported by the information given as there is no mention of multiple airlines competing in the same market.

Following Mergers That Raised the Market Shares of Two Airlines