The British bus industry has been organised as a system of strictly regulated route monopolies for over fifty years. Suggestions that this monopoly has lead to inefficiencies and the stifling of innovation have prompted a critical appraisal of how a competition structure might be generated. This paper attempts to determine the economically optimal market structure for the local (stage) omnibus industry in the United Kingdom, both by the development of appropriate models of bus markets, and by empirical observation of how bus markets operate. \ud \ud The paper concludes that competition between bus companies 'on the road' is liable, in the short run, to lead to a social welfare disbenefit to society. In addition, at present levels of service, and the present subsidy regime, incentives to enter the market are absent in a large proportion of the stage carriage network. Whilst competition, which will be more prevalent on profitable routes and timings, will reduce inter- nal cross-subsidy, and thus affect users of other, unremun- erative services, the research concludes that this reduction can lead to a social welfare improvement if there is a curtail- ment of activities which, at present costs of provision, outweigh consumers benefit, or if direct subsidy is substituted for cross-subsidy. \ud \ud There are, however potential gains from competitive stimuli in the form of lower cost operation, either by removal of previous inefficiencies or by the replacement of high cost operators by lower cost ones. The institutional problem is how to obtain the long run benefits without the short run costs of unfettered competition 'on the road'. \ud \ud This would indicate that in the bus industry competition for the market rather than competition in it, is required. The - paper concludes that for effective potezial competition in the bus industry, a regulated system with low entry barriers such as franchising or contracting of services should result
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