With reference to the passage, what is the nature of price and non-price competition in the market for bus transport.

University Degree Business and Administrative studies

With reference to the passage, what is the nature of price and non-price competition in the market for bus transport

The Market structure for buses is monopolistic, with many firms in different sizes and forms. The larger firms refrained from competing against each other on the grounds that both would be worser off as a consequence. There have been examples of were new entrants to the industry have charged lower fares than the rest. But however it is very easy for larger firms to kill off small ones by offering selective fare cutting and service introduction.

The nature of non-price competition on the other hand is very volatile. The reason being that it is difficult for firms to differentiate their products in pacific ways, which would influence consumers.

However it is clearly seen that to a large extent price and non-price strategies have little effect upon consumers and the level of competition. For example passengers will generally board the first bus for their destination, which comes and not be prepared to wait for a latter bus, which may be more comfortable or may even charge lower fares. But unless there is a huge difference between the fare prices.

So therefore it is clear that small possible under-capitalised operators with old busses could recoup significant amounts of revenues by offering a more easy and reliable services than larger operators.

Examine the advantages and disadvantages of deregulation

What is "de-regulation"?

Deregulation is the removal of controls imposed by governments on the operation of markets, particularly taking away barriers to entry.

Opening up of markets to competition can be achieved by:

· Allowing many companies to operate one route

· Introducing heavy penalties for price fixing cartels or predatory pricing

· Short franchises encourage low fares ...

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Examine the advantages and disadvantages of deregulation

What is "de-regulation"?

Deregulation is the removal of controls imposed by governments on the operation of markets, particularly taking away barriers to entry.

Opening up of markets to competition can be achieved by:

· Allowing many companies to operate one route

· Introducing heavy penalties for price fixing cartels or predatory pricing

· Short franchises encourage low fares but are a disincentive to long-term investment in infrastructure and rolling stock. See contestability theory.

The criteria to evaluate the performance of bus companies include fares, the number of services, service frequency, quality of service, changes in demand, loading, number of vehicles and their quality

Experience of deregulation in the UK Bus industry

Deregulation of the local bus market has resulted in an initial increase in competition with more buses resulted in

Benefits: More entrants

More frequent services

Lower fares

Costs:

More buses operating below full capacity i.e. a fall in loading

Adding to existing congestion

Increasing pollution especially in crowded city centres

Eventual consolidation through mergers has created an oligopoly (First Group, Stagecoach, Go-Ahead, Arriva and National Express) resulting in higher fares, lower levels of service and the withdrawal of marginally commercial routes

Many regions now have a monopoly local bus company

Abolishing of the licensing system has led to the heaviest disadvantages of the bus deregulation policy. There was a decline in information availability, reliability and service stability resulting in a net welfare loss.

To what extent is the market for bus transport ‘contestable’

A contestable market has no entry barriers - firms can enter or leave an industry costlessly. The threat of potential entry may be enough competition to ensure imperfectly competitive set price and output at or close to the competitive price and output.

Imperfectly competitive markets can be contestable. Contestability theory is associated with Baumol who argues the mere threat of new firms entering a market means existing firms act competitively ie lowest costs, prices and profits. The theory of contestable markets argues that what is important is not actual but potential competition.

A market is perfectly contestable when the costs of entry and exit are zero where any entry costs can be recovered on exit ie there are no sunk costs.

In a contestable market the threat of entry by potential rivals will ensure that the firm or firms in the industry will earn normal profits and deliver allocative and productive efficiency:

· Few barriers to entry into the market means potential entrants are able to enter market quickly if abnormal profits are made. This process helps ensure normal profits only, are earned in the long run;

· The size of firm is irrelevant;

· Price competition is unlikely, although it may occur for short periods;

The government has sought to create contestable markets in the rail, bus, ferry and air industries through deregulation (buses) and short franchises (trains).

However:

· Significant entry barriers may exist and incumbent firms can often scare potential entrants away from entering.

· Sunk costs refer to expenditure that cannot be recovered if a firm leaves an industry and represent a barrier to entry. If potential entrants anticipate high sunk costs contestability theory is less effective in lowering price and profits

· Short-term franchises introduce contestability into transport markets but deter long-term investment where firms feel they may lose their current franchise and experience sunk costs. For this reason, the latest franchise agreements are for longer periods eg 15 years. 15 year franchises create uncontested legal monopolies.

· Road haulage: many small one-lorry owners. Monopolistically competitive?

· Bus: after deregulation early competition mergers have created three oligopolies. Many regional bus monopolies are local monopolies. London Bus is a franchised monopoly. A national oligopoly and regional monopoly?

· Rail operators 28 TOCs are regional monopolies with a time-limited franchise. Extensive price discrimination on fares.

· Airlines: Bilateral agreements giving way to open skies resulting in an increase in the number of low cost operators and flights. Monopolistically competitive? Duopolies giving way to monopolistic competition

· Infrastructure natural monopoly argument means one regulated operator eg Railtrack and NATs