Competition and Regulation in Local Bus Services Philippe Gagnepain - - PowerPoint PPT Presentation

Competition and Regulation in Local Bus Services

Philippe Gagnepain Paris School of Economics-Université Paris 1

philippe.gagnepain@univ-paris1.fr (+33) 6 33 95 28 53

Overview

• Academic research perspective.
• Competition on the road: UK

– Industry not contestable. – Capacity competition.

• Competition for the market: France

– Risks of collusion among bidders.

• Regulation and incentives: France

– Political capture.

Competition on the road: Entry is unsuccessful

The industry is not perfectly contestable – Beesley (1990), Evans (1991), Banister (1997), De Borger and Kerstens (2006), Langridge and Sealey (2000), van der Veer (2002), and Wand and Yang (2005). – Existence of barriers to entry: Access to bus stations , use of travel cards, convenient terminal positions, access to bus stations, information points. – Sunk costs: trained staff, rolling stock. – Economies of experience, scale, density, and scope. – Incumbent can reduce prices very quickly or runs more buses and increases the frequency of the service.

Competition on the road: In price or frequency

– Wang and Yang (2005), and Van Reeven and Janssen (2006). – Two firms with distinct qualities of service and different fares.  Not relevant – Competition takes the form of service wars with fare matching. – Consumers do not care for quality and board the first bus that arrives. – Frequency is the key factor for competition.

Competition on the road: Random schedules

– Ellis and Silva (1998), Oldale (1998), Van Reeven and Janssen (2006), and Gomez-Lobo (2007). – Incentive to drive in front of each other: Head running and leapfrogging. – Bus operators randomize arrival schedules at the bus stop. – No commitment on timetable information. – Set the highest possible prices.

Competition on the road: A research agenda

• Most contributions of the economic literature are theoretically

derived.

• Need to be empirically validated.
• Estimate a cost function to evaluate economies of scale and scope.
• To detect predatory practices, compare prices to marginal and

average costs (Motta, 2004).

• To test for price competition:

– Estimate a structural model, demand function and price equation (Davis and Garces, 2010). – Reduced form: Effect of the # of firms on prices and frequencies.

• Additional thoughts: Gagnepain, Ivaldi, and Vibes (2011).

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Competition for the market: Key issues

• Urban transportation service concession awarded through a tender.
• Risk of collusion among bidders: France

– In theory, competitive tendering since 1993. Four corporations (Keolis, Connex, Transdev, and Agir). Contract length: 5-6 years on average. Groups committed to geographical areas: Very few changes of

• perators since 1993. One single bidder in a majority of cases

(see decision 05-D-38 of the Conseil de la Concurrence) – Should the recent Transdev-Veolia merger have been approved? Efficiency gains trough the merger; less competition ex-ante. Gagnepain, Ivaldi, Martimort, Pouyet (2012): Merger Guidelines for Bidding Markets.

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Competition for the market: Key issues

• Risk of collusion among bidders: France

– Long term relationship over several periods. Contract renegotiation The regulator strategically uses information from one period to another: Cost and/or choice of contract. The operator may shirk to avoid revealing information. Higher welfare if commitment. Ability of the regulator to commit to the same contract over time: Contract length? Gagnepain, Ivaldi, Martimort (2011).

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Regulation incentives and political capture

• (Re)Negotiation versus competitive tendering: Cost-plus contracts

(ex-post costs fully reimbursed) are still intensively used in France.

• Choice of contract important issue  Incentives to reduce costs.
• No regulatory agency; politicians. Asym info, unsophisticated.
• Regulators may favor interest groups and choose one regulatory

scheme or another. – Unions versus stakeholders. – Political color of the regulator, preferences of the operator, characteristics of the service.

• Important consequences on operating and social costs.
• Gagnepain and Ivaldi (2011), Chong, Staropoli, and Yvrande-Billon

(2011)

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Main lessons…

• Competition on the road seems limited.
• Organizing an efficient procedure to promote competition for the

market is a complex task.

• Need for an independent regulatory agency.
• Benefits?

– Reduce asymmetric information. – Avoid costly renegotiation. – Avoid political capture. – Welfare gains are known

• Cost?

philippe.gagnepain@univ-paris1.fr (+33) 6 33 95 28 53