Local bus services in the UK Peter Lukacs, OFT* ACE conference - - PowerPoint PPT Presentation

1

Local bus services in the UK

Peter Lukacs, OFT* ACE conference Bergen 17 November 2011

*All views expressed are personal and do not necessarily reflect those of the OFT

The UK Bus regime

• Deregulation of local bus services in 1986

(excluding London and Northern Ireland)

• Bus operators free to operate commercial

services at 56 days notice for new services and variations to timetables

• Tendered services subsidised by local

transport authorities

• In London route by route franchising system –

no ‘on the road’ competition

2

Industry structure

• About 70% of supply of commercial services

provided by four large national groups

• Stagecoach, Arriva, First, Go-Ahead
• A large proportion of the remainder provided by a small

number of regional groups or municipally owned companies

• About 1250 operators in total
• Substantial consolidation through merger

post deregulation through the 1990’s and continues now.

3

A contestable market?

• One idea behind bus deregulation was that local bus services

met the criteria for contestability (no sunk costs, no barriers to entry or exit and equal access to technology)

• Empirical implication is that current level of concentration may

not matter for performance due to the constraint of potential competition

• OFT Price concentration analysis found price reductions where

more competitors in local areas

• CC Performance concentration analysis found effect on service

frequency from additional competitor (but mixed evidence of a price effect) “an absence of persuasive evidence that the threat of new entry, and in many cases the threat of potential competition, act as a constraint on market outcomes” CC Provisional Findings 11.17

5

Market Feature: Tendency towards local ‘monopoly’ of commercial services

Little evidence of entry by ‘the big 5’ except through acquisition Barriers to Entry: Reputation Network Effects Depot Access Very little on-road competition

The OFT’s view on MIR

Higher prices to Consumers* Possibly lower Quality Potential for further harm if commercial ‘monopoly’ affects tendered services *Based on OFT’s price concentration analysis

CC’s provisional findings

Adverse Effect on Competition (AEC) caused by three features

• High levels of concentration at a route level and within

wider local areas

• Barriers to entry
• Sunk costs, intense post entry competition, incumbency

advantages (network and ticketing), depot availability, bus station access, cheap exclusion (e.g. obstruction of a rival’s services, preventing them from using bus stops and stands, intimidating drivers, vandalism of vehicles, and removing rival operators’ publicity and timetables)

• Customer conduct

Effective competition?

• ‘On the road’ competition typically does not mean that

consumers have a choice of operator since most routes are served by only one operator.

• Route level competition often short lived with many

allegations of predatory conduct and other forms of ‘cheap exclusion’

• head-to-head competition tends towards instability

“The competitive process does not necessarily lead to the most efficient operator running the route and the surviving operator is not necessarily exposed to an

• ngoing discipline following the exit of its rival” CC

provisional findings report, Summary paragraph 4

7

Geographic market segregation

• CC’s initial provisional finding was that the

conditions for tacit coordination were met but no AEC found

• Further findings of AEC in North East England

based upon contacts between two bus companies

• Evidence of retaliation and signalling

elsewhere in the country

• Notion of companies having ‘territories’ that

they defend

Tendered Services

• Tendered services often fill the gaps around

commercial services, services such as thin routes or covering evenings and weekends

• Weaknesses in competition for tendered services may

in part be driven by LTA tender design

• Only London has a fully franchised system, London is

special case. Much larger than any other city in the UK.

• Passenger number had been steadily falling outside
• London. Reversed recently partly due to changes in

concessionary travel. London bus use has been steadily expanding since mid 1990’s

Franchising

CC’s conclusion on franchising

• “franchising [is], in principle, a practicable alternative to competition ‘in

the market’, and could be made to operate successfully.” CC Provisional Decision on Remedies Para 408

• However disadvantages from reduced responsiveness to consumer

demand and potential distortion with inter-urban services

• Additional costs from LTA costs of award and monitoring, operator bid

costs, risk transfer from private to public sector weighed against lower costs from improved network design

• “Our preference, in relation to local bus services, is for remedies that

provide the basis for effective and sustained competition ‘in the market’ compared with those that promote competition ‘for the market’.” CC Provisional decision on Remedies Para 421

11

Peter Lukacs, OFT ACE conference Bergen 17 November 2011