Competition, contestability and predation: the economics of competition in deregulated bus markets

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Abstract
This paper considers applications of economic models to analyse the consequences of deregulation. The first part reviews the contestability logic which underlay the Government's bus deregulation proposals, and indicates a number of reasons why the deregulated local bus industry will not be perfectly contestable. If markets are not perfectly contestable, predatory practices may be possible, and the second and third sections of the paper consider, respectively, the theoretical debate on the rationality of predation, and empirical evidence on the existence of predatory practices (including “route swamping") in the deregulated British bus industry. The final section considers the analysis of competitive outcomes using models of both horizontal product differentiation and vertical product differentiation. Actual competition has not been consistent with the predictions of the vertical product differentiation model (fare and quality competition), though the outcomes of the horizontal differentiation model (equal fares and even headways) are also consistent with collusion.

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