Question

Maid of the Mist has been selling ferry tours of Niagara Falls from the U.S. side of the Niagara gorge since the 1840s. For the past several decades, no other ferry service provider has been permitted to sell tours of Niagara Falls. In 2012, Maid of the Mist signed a contract with New York State in which they agreed to pay $105 million for exclusive rights to provide tours of Niagara Falls for the next 30 years.

Source New York Times: Deal Allows Company to Continue Niagara Boat Tours

a) What type of a barrier to entry does this represent?

b) Why has the government allowed Maid of the Mist to act as a Monopoly in this industry? Why doesn’t the government allow ferry tours of Niagara Falls to be offered by say, 20 different providers?

c) What would happen to the expected price and quantity sold of tours of Niagara Falls if this barrier to entry did not exist (if there was additional competition in this market)? Economists generally prefer competitive markets to monopolies, but would it necessarily be a net positive change from society’s perspective if greater competition existed in this industry?

Answer 1

Answer a - The above situation represents legal barriers to entry.

Answer b - Maid of the Mist has been selling ferry tours since 1840. They have become a part of the cultural heritage of that area where the Niagara tours are identified by the tourists by this ferry service. So considering the smooth and efficient service by Maid of the Mist, providing them with a monopoly will assure service continuity without affecting the tourist perceptions by shared services.

Answer c - The expected price of the ferry service is likely to increase considering the monopoly given to Maid of the Mist. Variation in quality is a subjective matter that doesn't necessarily depend only on price but on various other factors. The presence of competition not only keeps a check in the price but also encourages the business to improve quality to attract customers buying decisions. Absence of the same might make Maid of the Mist reluctant over services and its price and quality.