Competition Act 1998 Decision of the Office of Fair Trading No. CA98/01/2008 Abuse of a dominant position by Cardiff Bus 18 November 2008 (Case CE/5281/04) Confidential information in the original version of this Decision has been redacted from the published version on the public register. Redacted confidential information in the text of the published version of the Decision is denoted by […][C]. CONTENTS Page 1 INTRODUCTION A Summary of the infringement 1 B Proposed action by the OFT 5 2 THE FACTS A Introduction 6 B The regulatory background 7 C The two main parties 10 D Chronology of key developments 14 E The complaint 23 F The OFT's investigation 24 3 LEGAL BACKGROUND A The Chapter II prohibition 28 B Application of section 60 - consistency with European Community law 29 C Application of Article 82 - effect on interstate trade 30 D Relevant case-law in relation to undertakings 30 E The concept of dominance 31 F The concept of abuse 32 G Effect on trade in the UK 34 H Burden and standard of proof 34 4 ASSESSMENT OF THE RELEVANT MARKETS A Introduction 37 B A framework for establishing the market definition 37 C The focal products 48 D The relevant product market 57 E The relevant geographical market 80 F Conclusion on the relevant markets 83 5 DOMINANCE: ACTUAL COMPETITION A Introduction 84 B Commercial and tendered bus operators 88 C Flow-by-flow analysis 93 D Network analysis 111 E Analysis of the potential for supply side substitution 117 F Conclusion on actual competition 118 6 POTENTIAL COMPETITION A Introduction 120 B Potential competition from rail services 120 C Potential competition from bus operators 121 D Cardiff Bus' network 126 E Costs of entry 135 F Reputation for aggressive response to entry 143 G The history of entry and exit, and expansion plans 149 H Cardiff Bus' ownership and governance 152 I Conclusion on potential competition 155 J Overall conclusion on dominance 156 7 ABUSE A Introduction 158 B Relevant conduct and legal framework 158 C The OFT's consideration of Cardiff Bus' conduct 162 D The rationale for Cardiff Bus' conduct 168 E Assessment of the evidence 173 F Analysis of costs and revenue 214 G Effect on competition 239 H Possibility of recouping losses 244 8 THE OFT'S PROPOSED ACTION A Finding of infringement 249 B Directions 249 C Penalties 249 ANNEXES 1 Flow-by-flow analysis methodology 251 2 Supply side substitution 266 1 INTRODUCTION A Summary of the infringement 1.1 By this decision, of which Annexes 1 and 2 below form an integral part, ('this Decision'), the OFT has decided that, during the period from 19 April 2004 to 18 February 2005, Cardiff City Transport Services Limited (trading as Cardiff Bus) infringed the prohibition imposed by section 18(1) (the Chapter II prohibition) of the Competition Act 1998 (the Act), by engaging in predatory conduct which amounted to the abuse of its dominant position in the relevant markets. 1.2 The Chapter II prohibition provides that any conduct on the part of one or more undertakings that amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom. 1.3 This Decision arises from a complaint made by 2 Travel Group plc (2 Travel) in November 2004. 1.4 In response to 2 Travel's entry into the market with a new no-frills bus service, Cardiff Bus introduced its own no-frills bus service (the 'white service', or 'white services'). Cardiff Bus' white service buses ran on the same routes and at similar times of day as 2 Travel's no-frills services and were run at a loss until shortly after 2 Travel's exit, when Cardiff Bus withdrew them. 1.5 Cardiff Bus claimed that it had introduced the white service in reaction to 2 Travel's introduction of no-frills services, with the intention of market testing the no-frills concept. Cardiff Bus also claimed that its decision to withdraw the white service was taken on the basis of an unexpected lack of customer demand, as well as driver shortages. 1.6 In this case, in defining the relevant markets, the OFT has considered the scope for demand and supply side substitution. The OFT concludes that the relevant markets are the provision of no-frills and normal bus services as part of the Cardiff Bus network together with urban bus services, and also interurban bus services and urban rail services (to the Office of Fair Trading 1 extent that they serve the same flows) into and out of Cardiff city centre. In geographic terms, the OFT has considered the supply of these services both on the relevant routes operated by the white services and on a network basis in the Cardiff County area (to capture the effect of network tickets). 1.7 While defining the relevant markets both on a route level and a network basis, the OFT considers that the network market is the most relevant for the assessment of dominance because Cardiff Bus relies on its network for its market power. On this basis, the OFT finds that Cardiff Bus' share of this market was over 66 per cent, and that it faced only fragmented actual competition, with no other operator having notable market share. 1.8 On a flow-by-flow basis, in terms of the city centre, Cardiff Bus accounted for 72 per cent of all bus services stopping at Cardiff Central Bus Station by frequency. Outside the city centre, Cardiff Bus had a market share on each of the small flows typically above 75 per cent. 1.9 Although the OFT considers that supply side substitutability is unlikely to constrain Cardiff Bus, as a cross-check, the OFT has also considered the implications for the definition of the relevant market of taking into account supply side substitution. On this basis, Cardiff Bus' market share was 69 per cent within a 30-minute isochrone from Cardiff Central Bus Station. 1.10 In terms of actual competition, therefore, on the basis of its frequency shares, Cardiff Bus was by far the largest operator of bus services both on a flow-by-flow and network basis. Furthermore, Cardiff Bus was the only significant provider of urban commercial bus services in the County with its actual competitors focusing on operating either tendered or interurban services. Cardiff Bus' rivals therefore did not have sufficient presence on the relevant routes, either individually or collectively, to exert a significant constraint on it. In addition, Cardiff Bus' independence from actual competitors was reinforced by the lack of potential for supply side substitution. Office of Fair Trading 2 1.11 Potential competition from train operators, in the short- to medium-term at least, was very unlikely and the potential for entry and expansion on the part of bus operators was also limited, both at the network level and on individual routes. Barriers to entry and expansion by existing bus operators included the strength of Cardiff Bus' network, the costs of entry, and the perception on the part of smaller operators of Cardiff Bus' reputation for responding aggressively and selectively to entry or expansion on particular routes. Potential competition from this source was therefore limited. 1.12 Overall, taking the evidence in the round, the OFT concludes that the limited actual and potential constraints on Cardiff Bus at the time of the operation of the white service support the conclusion that Cardiff Bus had sufficient market power to be able to act independently of its competitors, customers and consumers. Therefore, the OFT concludes that Cardiff Bus held a dominant position in the relevant markets. 1.13 Cardiff Bus provided little in the way of contemporaneous documents to support its explanation that the white services were introduced to test market demand for no-frills services, rather than merely to divert passengers from 2 Travel. The OFT identified evidence that conflicted with Cardiff Bus' explanation that it was conducting a market test. This included evidence that Cardiff Bus planned to launch its no-frills white services not as a true market testing exercise, but in order to divert potential customers away from 2 Travel. There was also evidence that Cardiff Bus publicly disparaged the concept of no-frills services and avoided promoting them. 1.14 Further to this, the OFT identified evidence that Cardiff Bus launched its white services with exclusionary intent – in other words, with the intention of diverting prospective customers away from 2 Travel and thereby forcing 2 Travel out of the market, thus protecting Cardiff Bus' dominant position, and not with the intention of competing on the merits or carrying out a genuine market test. This includes the fact that the white services were launched at or around the same time, and on the same routes, as 2 Travel's no-frills bus services. It also includes the substantial preparations made by Cardiff Bus to respond aggressively to Office of Fair Trading 3 2 Travel's entry, and ongoing assessment by Cardiff Bus of the threat posed by 2 Travel. In particular, the evidence demonstrates that the launch and continued operation of the white services was loss-making for Cardiff Bus. Overall, the revenues generated by the white services did not even cover the costs of paying the wages of the drivers who drove the white buses. 1.15 There is little evidence that Cardiff Bus considered the likely impact on its profits of launching the white services. Rather, the contemporaneous evidence suggests that Cardiff Bus simply wanted to divert passengers away from 2 Travel and did not consider whether or not the white services would be profitable in their period of operation.