Why Competition Does Not Work in Urban Bus Markets: Some New Wheels for Some Old Ideas

In this paper a model is presented based on ideas borrowed from the job search and price dispersion literature to characterise the pricing equilibrium of a competitive bus market in a more general setting than previously found in the literature. The results indicate that collusion is not required to obtain a monopoly price structure. Rather collusion can be interpreted as a coordination device among operators to reach their most preferred equilibrium. The results rationalise some of the stylised facts observed in liberalisation experiences around the world, including rising prices, excessive entry, convergence of fares among operators, and other observed behaviour. © 2007 LSE and the University of Bath