Explaining competitive practices in the bus industry: the British experience

Abstract

This paper examines the effects of the 1985 Transport Act on the local bus industry in Great Britain. An immediate distinction is made between the “commercial sector” that is run without subsidy and the “tendered sector” which receives subsidy administered by a system of competitive tendering.

It is argued that the theory of contestable markets does not appear useful in explaining all aspects of competition in the commercial sector. Instead, duopoly models based on game theory might be more useful. They are shown to help explain entry deterrence strategies, predatory behaviour, the trend to mergers/acquisitions, the tendency for competition to lead to high frequency/fare combinations and the pressures towards collusion. By contrast, it is argued that the tendered sector is inherently more contestable than the commercial sector.

It is concluded that there are important lessons to be learnt from British experience, particularly for regulators and legislators.

Key words:

• Collusion
• competition
• contestability
• game theory
• predation