Is the local bus market competitive?

One of the aims of deregulation is to encourage competition.

The Office of Fair Trading (OFT) referred the local bus market to the Competition Commission (CC) in January 2010 because they had reasonable grounds for suspecting that competition is not working effectively in that market

Buses matter providing a daily service for millions of people in the UK, carrying twice the number of passengers as do trains.

This is particularly true at a time when commuters are switching from cars to buses in response to record petrol prices – inter modal shift in action

There are equity issues. Buses are used by low income households those who cannot afford a car. Many passengers are dependent on the bus and do not have a realistic or desirable alternative, such as getting into a car or a train, if fares rise or services deteriorate.

Their provisional findings published today make interesting reading:

• the great majority of routes and local areas experience a high degree of concentration. Evidence: The five largest operators (Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach) provide 69 per cent of local bus services
• Consequently in many local areas, the largest operator has consistently faced little or no competition

Socially necessary loss making services are put out to tender by local authorities. The winning operator is the one offering the highest bid or the lowest subsidy. The CC notes the limited number of potential bidders in local areas can restrict competition and increase the cost of supporting these services. Why so few bidders? Economic theory suggests the presence of barriers to entry as the explanation

Helpfully the report identifies factors restricting new entry or expansion

• the tendency for instability in head-to-head competition, which means that competition is unlikely to be sustained and one or other rival is likely to exit. This prevents lasting competition developing in these areas and also deters potential entrants.
• Incumbent operators can benefit where multi-operator network tickets are inferior to their own network tickets
• Entrants can sometimes have difficulties in accessing bus stations on fair terms and developing depots.
• The great majority of urban areas have not experienced any large-scale entry in recent years—risks and costs are likely to increase with the scale of entry.

The CC is now consulting on measures to open up more markets by tackling the factors which can hinder competition:

• measures to increase the number of multi-operator ticket schemes and to ensure that these are effective and attractive to customers;
• restrictions on aggressive behaviour, such as ‘over bussing’ on particular routes and other obstructive behaviour aimed at reducing a rival’s ability to compete;
• ensuring fair access to privately owned and managed bus stations for all operators.

Further Reading

Summary of Provisional Findings

Notice of Possible Remedies