UK Buss Market - The Competitive Environment - Essay Example

? UK Buss Market – Competitive Environment Contents Introduction 3 UK Bus Market – Background 3 Analysis of the Market Using S-C-P Model 4 Structure of UK Bus Market 4 Conduct of the Firms in the UK Bus Market 5 Performance of the Firms in the UK Bus Market 5 The Firms’ Behaviour 6 Reasoning behind Competition Commission’s Concerns, Actions and Decisions 6 Conclusion 7 References 8 Introduction Competition plays a very important role in the growth of a market and economy. Increasing competition is the most effective way of enhancing the welfare of the consumers. Competition breeds entrepreneurship, creativity, innovation and increases the efficiencies of the firms. It also results in low prices along with better services and products for the consumers. But perfect competition is very difficult to achieve as firms in a market continuously try to beat the competition and increase barriers to entry. Firms at time even come up with strategies and partner with rivals to keep new firms from entering the market. This paper will analyse the markets conditions and the behaviour of the firms in the UK bus market. It also explains the reasoning behind the action of the regulators in the market. UK Bus Market – Background It has been 25 years since the UK Bus market was deregulated but still only a handful of firms account for the majority of the market. The competition in the market has stagnated and the existing big firms know that they have very little to worry with respect to new firms entering the market or existing firms challenging their market dominance. As a result of this there is no drive among the firms to innovate or improve the services. Pricing is also on the higher end negatively affecting the consumers. Also it has been found that the existing firms have avoided competing with each other with the intention to protect their territories. Firms have used short-term measures to ensure rival markets quit the market (BBC, 2011). There are around 1,245 bus companies in UK but 70% the market is accounted by Stagecoach, Go-Ahead, FirstGroup, Arriva and National Express. Competition Commission has proposed numerous measures to increase the competition in the market (BBC, 2011). Analysis of the Market Using S-C-P Model The Structure-Conduct-Performance (S-C-P) model is an effective tool developed by economists to understand the relationship between relationship between the market performance, conduct and structure (Faulkner & Campbell, 2006). Even though the casual view is that the structure of a market determines conduct of the firms in the market and in turn the performance of the both the firms and the markets it is not always reliable. It is possible that conduct of firms in a market can affect the market structure, for example collusive prising agreements affects the structure of the market. It is also true that the performance of firms can affect the structure of the market, for example best performing firms in a non-homogenous market exert great market domination. Therefore, in the current context, the structure, conduct and performance will be analysed individually and then summarised collectively in the next section. Structure of UK Bus Market The most important characteristic of market structure is the number of firms in the market. Even though there are around 1,245 firms in the market, the market is dominated by five firms whose collective market share is about 70% (BBC, 2011). The UK bus market is an oligopoly as it is controlled by a 5 major firms (Banister, 2002). The five-firm concentration ratio of the UK bus market is 66.7 Entry costs into the market are high as it demands huge capital investments to set up the service and have it running. Also the sunk costs of the market are high which has made it less contestable. The service offered here is non-homogenous and the firms have the opportunity to differentiate themselves from the competitors through different marketing and branding strategies. Economies of scale is absent in the market. The Bus market is greatly vertically integrated which means that the process of providing the service is completely under the control of one single enterprise. The turnover of customers is high as customers are ready to switch over from one company to another if the conditions in the market change. From the above analysis of the structure it can be concluded that theoretically UK bus market being an oligopoly must encourage innovative behaviour from the firms. Also it must encourage fair competition. Conduct of the Firms in the UK Bus Market There is evidence of anti-competitive behaviour in the UK bus market. Firms have tried to avoid direct competition with one another by sticking to their territories. Also the pricing is very high due to lack of competition. It can be said that firms have indulged in collusion (Clarke & Morgan, 2006). They have tried to deliberately not compete with each by sticking to their territories. Also they have adopted temporary measures to compete with new a company which has eventually led the new company to exit the markets. Measures such as operator behaviour and over-bussing have been used to keep rivals out. The firms have behaved strategically in order to retain profits and deter the entry of new competitors. Performance of the Firms in the UK Bus Market Trends suggest that the firms have continuously increased prices and have enjoyed excess profits. As there is no price competition among firms, there is evidence that suggests of excess profits. The firms have lacked innovation in improving the services for the consumers. There is no evidence to show that there has been decent investment in research and development. There have been no efficient outcomes as a result of the conduct of the firms. Firms have consistently increased their dominance over the market. Firms have gained more market power as their market share in the overall market has increased. The top firms have achieved sustained competitive advantage over others as a result of their market position. The Firms’ Behaviour Now let’s put three together: Structure, Conduct and Performance. According to S-C-P model as the concentration of a market increases the monopoly power also increases. Also as the barrier to entry becomes greater, the ability to exert market power of the firms also increases (Djolov, 2006). In the UK Bus market, firms have built collective monopoly power as the concentration of the market has increased. As a result of this, firms have charged higher prices to the customers and behave as though they are monopolies. It is the Anti-competitive behaviour of the firms that has increased the barriers to entry in the market. The fact that they been generating profits has meant that have not investing resources in improving the services. Reasoning behind Competition Commission’s Concerns, Actions and Decisions It is clear from the analysis of the market that the top firms have used their market position to attain unfair advantage and raise barriers to entry. They have also used collusion strategies to avoid competition with each other and charge high prices for the consumers. There has been no innovation and no imitative from the firms to provide better services that what is being offered right now. It is the lack of competition in the market that is resulting in the compromise of the consumer’s welfare. Also it is the responsibility of Competition Commission according to Stability and Growth pact to foster competitiveness in the market. It is for this reason that the Competition Commission has decided to ban practices such as over-bussing and any other short-term practices that are aimed at eliminating competition in the market. Also it has decided to bring in a rule which will ensure that bus stations will be shared and ‘multi-operator ticketing schemes’ will be accepted. Conclusion This paper has successfully analysed the UK bus market using the S-C-P criteria. The market is an oligopoly with 5 major firms controlling the market. Firms have abused their market power to avoid competition with each other and eliminate new entries. Also there has been any initiative or innovation from the firms to improve the service to the consumers. Competition commission has had to step in make changes in order to increase the competition in the market. References Banister, D. (2002). Transport planning. NY: Taylor & Francis. BBC (2011). Bus market not competitive, Competition Commission says. [Online]. Available at: http://www.bbc.co.uk/news/business-16261086. Accessed on 9 Mar 2012. Clarke, R. & Morgan, E.J. (2006). New developments in UK and EU competition policy. MA: Edward Elgar Publishing. Djolov, G. (2006). The economics of competition: the race to monopoly. NY: The Haworth Press. Faulkner, D.O. & Campbell, A. (2006). The Oxford Handbook of Strategy. NY: Oxford Handbooks. Read More