Unit 3 Micro: Oligopoly and Duopoly in Bus Markets

The UK Competition Commission has published an important report into the market structure of local and regional bus services in the UK, twenty five years after the industry was deregulated and largely privatised. Coverage of the report can be found here (BBC news).

Largely as a result of a long-term process of consolidation through merger and acquisition, the UK bus industry is found to be highly concentrated with five businesses dominating the sector even though more than 1,200 businesses provides services.

The five largest operators (Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach) carry 70 per cent of those passengers. The CC also found that head-to-head competition between operators is un-common and that-on average-the largest operator in an urban area runs 69 per cent of local bus services - effectively a monopoly position.

Because of the absence of genuine in competition in many towns and cities, the Competition Commission argued that market power had lead to passengers facing less frequent services and, in some cases, higher fares than where there is some form of rivalry.

The Commission wants to increase the contestability of the market and proposes better ticketing, better customer information, fair access for all operators to bus stations and closer scrutiny of future bus company mergers.

Bus Industry Background

* Passenger volumes: In 2010/11, 2.9 billion passenger journeys were made on local bus services

* Long run decline: The volume of passengers has stabilised after several decades of steep decline

* Concessionary fares: 36 per cent of passenger journeys in 2010/11 were made by concessionary passengers. This is a key feature of the UK bus market. Concessionary passengers do not pay any fares (after 9.30am in England and at all times in Scotland and Wales

* Main operators: The five largest operators are Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach

* Local monopoly/duopoly: Most areas are served by just one or two operators with a significant share of supply

* Low price elastcity of demand - the report found that changes in the fare or service on existing services offered by local bus operators had little effect on passengers’ overall use of the bus. It found that the price elasticity of bus demand, from all individuals in the sample, with respect to bus fares is –0.36 (i.e. inelastic). No significant differences were found for the time of day suggesting little actual difference in Ped between peak and off-peak times

* Business stealing effects: The Commission finds this is a key feature of the market, Most customers board the first bus heading towards their destination rather than compare prices between rival operators. ‘Business-stealing’ effects in local bus services occur relation to frequency. If an operator increases its frequency, the increase in demand for its services will largely be as a result of customers switching from other operators, rather than as a result of an increase in the total market demand for bus services.

* Multi-modal competition: The CC report finds that price elasticity of demand for bus service is always low and nearly always less than -0.5 which provides an opportunity for operators to increase fares and raise profit margins. But the bus operators claim that multi-modal competition provides a constraint on their pricing power even when they have a local monopoly. Higher fares might prompt people to use a car or take local rail and tram services if they are available. Fare rises might also be limited by the risk of creating adverse publicity in local areas

* Rates of return (profit): Bus operators with substantial market power have earned profits that were persistently above the cost of capital on a national basis suggesting some supernormal profits for these busiensses. The overall average rate of return on capital employed (ROCE) for the five-year period investigated was 13.5%

* Profitability at the end of the 5 year investigation period were higher than at the start

* Barriers to entry: Sunk costs of bringing a route to profitability can be substantial as are the risks from an intensity of post-entry competition as incumbent operators react and respond to new bus operators

Stagecoach
Operator of bus, coach and rail services in the UK and North America
Operates the South Western Trains and East Midlands Trains rail franchises in Great Britain
Operates Sheffield Supertram light rail service
Provides inter-urban express services under the megabus.com brand
Involved in the operation of the West Coast Trains rail franchise (through its 49 per cent equity stake in Virgin Rail Group) and Scottish Citylink coach services.
Annual revenues in excess of £2.4 billion

First Group
Operates public transport services in the UK, the Republic of Ireland, Germany and North America
Operates the Great Western, Capital Connect, TransPennine Express, ScotRail rail franchises
Annual revenues in excess of £6 billion

Arriva
Operator of bus and rail services in the UK and in 11 European countries
Operates an extensive rail network through its CrossCountry and Welsh rail franchises
Annual revenues in excess of £ billion
Now a wholly-owned subsidiary of Deutsche Bahn AG, a multinational transport and logistics provider based in Germany.

National Express
Operator of coach, rail and bus services in the UK (around 54 per cent of its group revenues) and bus services in Spain Operates the c2c and National Express East Anglia (which includes Stansted Express) rail franchises
Operates the Midland Metro and the West Midlands light rail service between Birmingham and Wolverhampton
Annual revenue in excess of £2.1 billion

Go Ahead
Provides bus and rail services in the UK
Operates the Southern, Southeastern and London Midland rail franchises in Great Britain
Annual revenues in excess of £2.3 billion

More reading

Daily Telegraph: Competition regulator outlines bus market shake-up

Competition Commission Final Report: Future for the UK Bus Industry

Channel 4 News: Local councils cut bus subsidies