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Oxford Brookes University. www.brookes.ac.uk/go/radar Directorate of Learning Resources An analysis of the impact of privatisation and deregulation on the UK bus and coach and port industries Roger Derek Sealey Oxford Brookes University Submitted in partial fulfilment of the requirements of the award of Doctor of Philosophy November 2003 Acknowledgements There were many people who have assisted me this dissertation and I would like to take this opportunity of thanking them all. I would also like to thank: Eddy Batchelor, Librarian T&G Central Office; Malcolm Bee, Oxford Brookes University; Marinos Casparti, T&G Central Office; Bill Dewhurst, Ruskin College; Jim Durcan; Steve Edwards, Vice Chair, Passenger Transport Sector National Committee, T&G; Dr David Evans, Oxford Brookes University; Dr John Fisher, Director of Education, T&G Central Office; John Forth, National Institute for Economic and Social Research; Val Horsfield, Ruskin College; Jim Hunt, Former Regional Secretary, Midlands Region, T&G; Phil Hunt, T&G Central Office; Chris Keeble, Assistant Librarian, Ruskin College; Simon Kirby, National Institute for Economic and Social Research; Dr Bob Langridge, Oxford Brookes University; Dr Heather Leggate, London Metropolitan University; Joyce Mamode; Martin Mayer, General Executive Council Member, Passenger Transport Sector, T&G; Professor James McConville, London Metropolitan University; Neil Milward, National Institute for Economic and Social Research; Roy Moore, Ruskin College; Nigel Morter; Geoff Pargeter; Dr Bob Purdie, Ruskin College; Dr Brian Shaw, Oxford Brookes University, Graham Stevenson, National Organiser, Transport Sector, T&G; Catherine Tranmer; Neil Vaughan, Librarian, and the staff at the Wheatley Campus Library, Oxford Brookes University. Thanks are also due to the Finance and General Purpose Committee, of the Midlands Region of the Transport and General Workers' Union, National Education Committee of the T&G and the 5/60 Branch for their financial assistance. Especial thanks are due to David Horsfield, Librarian, Ruskin College, Jennifer Montague Jones and Margaret Pargeter for their comments and suggestions. I would also like to thank Professor Richard Disney, External Advisor, and Dr Maureen Pike, Director of Studies for supervising the dissertation, and last but not least Alan Jarman, who originally suggested the idea this dissertation and who also assisted in supervising this dissertation with enthusiasm and humour. 1 TABLE OF CONTENTS Acknowledgements Contents ii .................................................................................................. Tables ..................................................................................................xiv Figures ii Abstract ..................................................................................................xx 1 Introduction 1.1 Key Objectives and Outline of Dissertation 1.1.0 Introduction 1 .............................................................................. 1.1.1 Key Objectives 1 ......................................................................... Outline Dissertation 2 1.2 of the ....................................................... 1.2 The SCP Paradigm SCP Paradigm 4 1.2.0 Introduction to the ............................................ Definition SCP Paradigm 4 1.2.1 A Simple of the ............................... 1.2.2 Market Structure 5 ....................................................................... 1.2.3 Conduct 5 .................................................................................... 1.2.4 Performance 5 ............................................................................. 1.2.5 Problems SCP Approach 6 with the ............................................ 1.2.6 The SCP Paradigm and Problems with Market Structure........ 6 1.2.7 Concluding Comments SCP Paradigm 7 on the .......................... 1.3 Contestable Markets 1.3.0 Introduction ContestableMarkets 7 to ........................................ 1.3.1 The Background Contestability Theory 7 to ............................... 1.3.2 ContestableMarkets Natural Monopoly 8 and ............................ ContestableMarkets Perfect Competition 89 1.3.3 and ......................... Conditions for Contestable Market 9 1.3.4 a ....................................... Freedom Entry Without Limit 9 1.3.5 of and ....................................... Sunk Fixed Costs 10 1.3.6 v ................................................................... Run Profit Taking 11 1.3.7 Hit and ........................................................ in Contestable Market 11 13.8 No Inefficiency a ................................. 1.3.9 The Absence Cross Subsidy 12 of ................................................. 1.3.10 Contestability Regulation 12 and .................................................. 1.3.11 A Theoretical Benchmark 12 ........................................................ 1.4 Criticism of the Contestable Market Theory 1.4.0 Introduction 13 .............................................................................. 1.4.1 Contiguous Markets Surmountable Barriers Entry 13 and to ....... 1.4.2 Contestable Markets Technological Change 13 and ..................... 1.4.3 Freedom Entry Imperfect Contestability 14 of with ..................... 1.4.4 Sunk Costs 14 ................................................................................ 1.4.5 Sunk Costs Market Structure 16 and ............................................. 1.4.6 Specific Assets 17 ......................................................................... 1.4.7 Fixed Costs Barriers Entry 18 and to ............................................ 1.4.8 The Austrians Monopoly 18 and ................................................... 1.4.9 Ultra-Free Entry 19 ....................................................................... 1.4.10 The Problem Endogeneity 20 of .................................................... 1.4.11 A Final Comment SCP Paradigm 21 on the .................................. 1.5 The United States Airline Market 1.5.0 Introduction 21 .............................................................................. Airline Market Contestability 21 1.5.1 The United States and .............. 1.5.2 City-Pair Airline Markets 22 ......................................................... 1.5.3 Hub-And-Spoke Route Structures 23 ............................................ 1.5.4 No Sunk Costs 23 .......................................................................... 1.5.5 Hit Run Entry 24 and ..................................................................... 1.5.6 Post Deregulation Structure 24 ..................................................... 1.5.7 A Concluding Comment 25 ........................................................... 1.6 Privatisation and Deregulation 1.6.0 Introduction 25 .............................................................................. 1.6.1 Regulation 26 ................................................................................ 1.6.2 Market Failure Regulation 27 and ................................................. 1.6.3 Market Failure Involving Monopoly 27 ........................................ 1.6.4 The Role Governments 29 of ........................................................ 1.6.5 A Realist View Regulation 31 of .................................................. The Cost Maintaining Regulation 31 1.6.6 of ........................................ 111 1.6.7 Protecting Interests Regulated 32 the of the .................................. 1.6.8 Other Sources Regulatory Failure 33 of ........................................ 1.6.9 Escapable Inescapable Regulatory Failure 33 and ........................ 1.6.10 Regulation in 1980s 34 the ............................................................ 1.6.11 Conclusions Regulation 36 on ....................................................... 1.6.12 Privatisation 36 .............................................................................. 1.6.13 The Conservatives Privatisation 37 and ........................................ 1.6.14 Some Objectives Privatisation Deregulation 38 of and ................ 1.7 Conclusions 1.7.0 Introduction 39 .............................................................................. 1.7.1 Key ResearchAreas Dissertation 39 of the ................................... 1.7.2 Tools Analysis 40 of ..................................................................... 2 The Bus and Coach Industry: A contestable market? 2.1. Introduction 2.1.0 Introduction 41 .............................................................................. 2.1.1 An Overview Market 42 of the ..................................................... 2.2 The UK