Competition: what's not to like?

Here in Great Britain (definitely in England, outside London), after getting on for 3+ decades of encouraging competition in the provision of public transport services, the government is tilting the balance back towards ‘coordination’. Bus operators are either having their businesses made subject to compulsory competitive tendering, or are being required to sign up to ‘partnerships’ that remove competition in favour of sharing routes between established operators. In the meantime, from the country that probably invented on-rail competition for passenger services, the recent consultation on (now-delayed) legislation introducing rail reform wants to make it harder for new open-access services to be introduced, while contracted operators are encouraged to coordinate, rather than compete, with other contracted operators. And this is the context of transportation & storage being one of the more concentrated sectors in the UK economy, according to the Competition & Markets Authority (see figure above).

Does it matter? Should services providing social benefits be delivered on commercial terms? There’s always a balance, but there’s a risk we’re tilting it too far towards coordination. Why? Much comes down to what economists casually refer to as ‘dynamic efficiency’, one of the main benefits from competition and/or certain types of incentives, but which is almost entirely ignored in the appraisal of policy choices.

The majority of businesses operate in a competitive environment—if you’re not responsive to your customers, aren’t efficient or innovative, you won’t make the profits you need to attract investment, or ultimately to survive. This places a premium on horizon scanning, tweaking your products in the short and long term to fit the needs and preferences of customers. This dynamic updating of your offer, alongside tight control of costs, is key to the success of any business. It’s also the cornerstone of competition policy, which works hard to preserve the benefits from competition in a range of industries, through merger control, testing for illegal cartel behaviour, and investigating claimed breaches of other antitrust rules. So much effort and money is expended on preserving and enhancing competition, as there is not only economic theory, but also a belief among business people that competing on fair terms is a necessary condition for success. Furthermore, evidence suggests that market concentration affects poorer people more than the rich (Figure 7 in the same CMA document):

That’s why it’s rather odd to see on-road competition disappearing from local bus markets, and on-rail competition being discouraged by government, especially in England. A symptom of the wider approach to transport is to be found in appraisal guidance. While it’s fair to say that the underlying economics relies on competitive markets, in which better transport links increase productivity—to the extent that wider economic impacts emerge when transport can be shown to increase or decrease competition in the spatial areas it affects—appraisal assumes nothing about competition in the provision of transport services. As such, proposals that increase or reduce competition (e.g. between airports, ports or rail companies) rarely capture these effects in the business-case analysis that gets undertaken.

We therefore rely on analysts deciding that the effect of a proposal on competition is substantive, and that they have the necessary skills to create evidence of those effects as part of a business case. To the extent this involves additional effort, which may undermine what a decision-maker is trying to achieve, I think this is unlikely.

There’s lots of reasons why more coordination of transport services can be beneficial—not least with government clearly acting as the funder of transport last resort throughout the pandemic (for surface transport, at least, before anyone in the aviation industry gets in touch). However, if we’re not producing the evidence to balance these benefits by showing how and where competition can deliver for passengers—not least via dynamic efficiency gains—we might take the wrong decisions.?