Question

Some years ago, two intercity bus companies, Greyhound Lines, Inc. and Trailways Transportation System, wanted to merge. One possible definition of the market in this case was “the market for intercity bus service.” Another possible definition was “the market for intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights.” Which definition do you think the bus companies preferred, and why?

Short answer

In summary, the bus companies Greyhound Lines, Inc. and Trailways Transportation System would likely prefer the broader market definition of "the market for intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights." This is because, under this definition, they can present their merger as being part of a competitive market with various transportation options, reducing the likelihood of facing regulatory issues and scrutiny for potentially creating a monopoly.

Step-by-step solution

Understand the difference between the two market definitions

The first definition focuses only on the market for intercity bus service, while the second definition is broader and includes various modes of intercity transportation, including personal cars, car rentals, passenger trains, and commuter air flights.

Analyze the impact of market definition on the merger

The definition of the market will have a significant impact on the regulatory approval process for the merger. If the market is defined narrowly, such as only intercity bus service, the combined companies may face scrutiny for dominating the market and potentially limiting competition. In contrast, if the market is defined broadly to include all intercity transportation options, they can argue that they have plenty of competition and therefore, their merger should not be restricted on monopolistic grounds.

Determine the bus companies' preference

It is very likely that the bus companies Greyhound Lines, Inc and Trailways Transportation System would prefer the broader definition of the market for intercity transportation. This is because, under the broader definition, they can present their merger as being part of a very competitive market, reducing the likelihood that they will face regulatory issues and scrutiny.

Explain the reason behind their preference

The bus companies would prefer the broader market definition because it makes their merger seem less threatening to competition and less likely to create a monopoly. In the broader market definition, they can argue that competition still exists from various other modes of transportation, such as personal cars, car rentals, passenger trains, and commuter air flights. This will likely make it easier for them to gain regulatory approval for their merger, thereby allowing them to move forward with their business plans.

Key concepts

Intercity Transportation

When we think of intercity transportation, it involves any form of travel that gets people from one city to another. This can include personal vehicles, buses, trains, planes, and even rental cars. Each mode of transportation offers different advantages for consumers, such as cost, convenience, and time efficiency. For instance, buses like Greyhound Lines, Inc. and Trailways Transportation System, may offer cheaper fares for budget-conscious travelers.

In considering the market for intercity bus services, it's not just about the buses themselves, but the broader context in which they operate. Consumers might choose buses over other modes based on several factors, such as the availability of other options, the total costs (including indirect costs like parking for personal cars), or the geographic distance they need to cover. The competitive landscape of intercity transportation hinges on how easily consumers can substitute one form of transport for another.

Mergers and Acquisitions

The terms mergers and acquisitions may sound complex, but they boil down to companies joining forces or one buying another. This can occur for various reasons, including gaining market share, reducing costs through economies of scale, or expanding into new markets. In the case of Greyhound and Trailways, their merger would mean combining resources and potentially reducing competition in the intercity bus market.

However, a successful merger must navigate through legal and regulatory laws designed to maintain fair play in the market. The way the market is defined can heavily influence how a merger is viewed by regulators. A narrow market definition can equate more scrutiny, as the potential for a dominant combined entity is higher. On the other hand, a broader market definition could highlight the existence of robust competition, thereby easing regulatory concerns.

Antitrust Regulation

Antitrust regulation comes into play when there's a concern that businesses could become too powerful and limit competition. These regulations are essential to ensure that markets retain their competitive nature, benefiting consumers with more options and fair prices.

When a company seeks to merge or acquire another, antitrust authorities will scrutinize the deal to make sure it doesn't lead to an unfair concentration of market power. They look at the market definition to gauge the level of competition. If a company can successfully argue for a broader market, where many competitors exist, they're more likely to be given the go-ahead for the merger, as was likely the preferred argument by Greyhound and Trailways.

Competitive Markets

A competitive market is an economic concept where multiple firms sell similar products or services, and none is large enough to dictate the terms of business. This breeds a consumer-friendly environment with choices, innovation, and fair pricing.

For intercity transportation, a competitive market means that bus companies, train services, airlines, and car rental services are all competing for customers, ensuring that no single service can monopolize the market. Maintaining this competitive balance is what regulations aim to achieve. By considering a broader definition of the market, regulators may deem the market competitive even if one type of transportation, like intercity bus services, were to undergo consolidation through mergers.