South-Western College Publishing - Economics  
I'll get you there for $14.95!
Subject New bus lines offer competition to entrenched firms like Greyhound
Topic Monopolistic Competition; Profit maximization and the firm
Key Words

bus travel; Chinese competition; Greyhound; competition; price, revenue

News Story

New immigrant businesses are going head-to-head with American icons. Greyhound has just reduced its fare for its Boston-New York run to $15--it had to, since Lucky Star Travel, a Chinese business, had been charging $15 for some time.

Taking a page from the low-cost airlines' manual, upstart bus lines reasoned that it was possible to be profitable charging a $15 fare. Picking travelers up curbside, dropping them off in no-parking zones, and avoiding terminal fees have enticed travelers away from Greyhound. Such a no-frills approach has Greyhound in an uproar, claiming that the new competition is unfair: Drivers are unlicensed, buses aren't safe, and drivers aren't drug tested.

All the same, Greyhound has responded to the competition by reducing its fares for its Boston-New York run from its former $70 to match the Chinese lines' $15 fare. Greyhound is caught in a difficult spot, though, since it eliminated service to 260 Western towns that weren't profitable so that it could concentrate on its shorter, more profitable runs. These runs are exactly where Greyhound will be competing with smaller, upstart bus lines.

The head of Boston Deluxe, one of the small Chinese lines, argues, "I want to force Greyhound to buy me out. Unless they buy me, Greyhound has no chance. Before that, I'm like all American people. I just want to make a buck."


As bus fares continue to fall, what happens to economic profit in this industry? Why?

2. Given that bus travel can be described as a monopolistically competitive market, what happens to demand for travel on Greyhound buses as new competitor lines enter the market? Why?
3. Assuming that Greyhound buys out firms like Boston Deluxe, as discussed in the last paragraph, what will happen to the market price? Explain carefully.
Source Barry Newman. "On the East Coast, Chinese Buses Give Greyhound a Run." The Wall Street Journal, 28 January 2005. A1+.

Return to the Monopolistic Competition | Profit maximization and the firm Index

©1998-2005  South-Western.  All Rights Reserved   webmaster  |  DISCLAIMER