This project aimed to provide a factual and theoretical analysis of effects of Quality Partnerships to date on competitive behaviour and market structure, to monitor any such effects during the course of the project and to consider future effects, particularly with reference to legally backed partnerships. A model of the bus market with the capacity to address competition issues has been developed, tested and applied in this study and in work for CfIT 'Achieving Best Value for Public Support in the Bus Industry' as well as in this work.
The objectives of the study were:
to undertake a set of case studies on the effects of Quality Bus Partnerships;
to develop a simulation model of the bus market, at corridor level using real data on demand, revenue and cost, and driven by evidence-based elasticity;
to use the model to assess the economic benefit of quality partnerships and assess the impact of such agreements on market structure and performance.
Case studies and model development
From the case study strand three main conclusions were drawn:
- Quality is an important dimension of bus service;
- The development of successful quality initiatives requires some form of co-operation between the commercial operators and local authorities;
- There is clearly resistance to 'hard' forms of contract backed by statute as opposed to 'soft' forms of agreement. This may be largely because softer forms of agreement are more flexible and adaptable to changes in market and local political circumstances.
The model development work has concluded that:
- Quality enhancement and fare reduction were both found to be effective ways of increasing economic welfare relative to frequency enhancement for the relatively high frequency corridors tested.
- Quality packages were beneficial to both the operators and to society as a whole given the elasticities, costs and traffic densities tested. However, without some form of revenue or capital contribution from operators, there is no direct benefit to the local authority. This is a structural weakness in the incentives to create quality partnership arrangements.
- Quality measures are unlikely to impact significantly on the competitive environment. Competition is not usually a sustainable outcome. Quality measures are unlikely to stimulate competition and it would be a mistake for the competition authorities to dictate a more competitive outcome as a requirement for approval of a quality partnership. Where quality enhancements do stimulate competition, such competition is likely to be in the service rather than the price dimension. Moreover, such service competition may not be beneficial in welfare terms.
- However, the implication is that the natural outcome is some form of weak monopoly under which the gains from publicly funded quality measures are partially captured in enhanced monopoly rents to bus operators. Operators who are effectively maximising patronage subject to a minimum profit or margin constraint will be incentivised to pass at least some of the benefits on to consumers. This type of objective is consistent with public statements by bus operators about their objectives and with the less than unit fare elasticities observed in the market-place.
The conclusions abo
Please refer to the 'Key Results' section.