The supply of bus services in Mid and West Kent

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Summary

In a reference made on 15 December 1992 (see Appendix 1.1) the Director General of Fair Trading asked us to investigate and report on whether a monopoly situation existed in the supply of bus services in Mid and West Kent. This reference area stretches from the Medway towns in the north through the rural High Weald to the East Sussex border and includes the Maidstone, Sevenoaks, Tonbridge and Tunbridge Wells areas.

Within this area the dominant supplier of bus services is The Maidstone & District Motor Services Ltd (M&D). We established that it provides about two-thirds of the local bus services in the area and thus that a scale monopoly situation exists. There are about 20 other operators, some of these very small businesses, offering commercial and tendered local bus services within the reference area. Of these operators, three, Bygone Buses, Turners of Maidstone and Mercury Passenger Services, were operating commercial services during the course of our inquiry in direct competition with M&D.

We received a number of complaints about M&D's response to competition in the area. These included complaints about the frequency, timing and operation of M&D's services on routes where competition was occurring and about fares charged. M&D's main response to the entry of a competitor on its routes has been to introduce extra journeys, usually timed to run immediately before the competitor's, and sometimes combined with selective fare cuts confined to these journeys. M&D argued that its responses were appropriate to protect the profitability of its network and that the costs of providing the additional journeys were small and covered by the revenue generated.

We do not accept these arguments. We do not consider that the immediate costs of a response are an adequate basis for assessing its acceptability in competition terms. We consider that the costs and revenue of such responses must be measured over a longer term, with a realistic assessment of the costs incurred, and that M&D's operation of additional journeys not covering such costs operates or may be expected to operate against the public interest.

Furthermore, we consider that, even where a competitive response meets the cost criteria above, it is not necessarily in the public interest. We accept that adjusting the timing and frequency of services is one of the ways in which operators can justifiably compete for passengers. However, we consider that the introduction by the dominant operator of additional journeys, timed immediately before a competitor's, was designed to target competitors without the resources to retaliate in kind, and to encourage their withdrawal from the routes. We conclude that this behaviour by M&D operates or may be expected to operate against the public interest.

We also found that M&D's registration of commercial services against a competitor's tendered service, operation of unregistered buses and use of selective fare reductions on journeys immediately in front of a competitor's journeys operate or may be expected to operate against the public interest.

We considered action to remedy these effects. Our main recommendation is that, where another operator registers on a route in competition with M&D, M&D should not then register journeys before the competitor's journeys, on this or substantially similar competitive routes, within a shorter interval than the competitor has itself registered in front of the M&D service. In framing this recommendation we have noted M&D's arguments about the practical difficulties any remedy of this kind would cause for it. We recognize that some difficulties may arise in implementing such a remedy across a network but we have not attempted to deal with these by laying down detailed rules. We think the intention of our remedy is clear and, if complaints arose, it would be for the Office of Fair Trading (OFT) to determine, in the particular circumstances, whether the M&D registration was justified. While we cannot be sure that this untried remedy will fully meet the detriments we have identified, we think it will significantly constrain M&D's future behaviour.

We also recommend that:

(a) if a competitor withdraws from a route after M&D has registered additional journeys immediately before it, M&D should maintain its frequency of service and not increase fares on the route for at least one year;

(b) M&D should not register commercial services against competitors' tendered services; and

(c) it should not make selective fare reductions on services running immediately before a competitor's.

Finally, we examined the arrangements for access for other bus operators to the Pentagon Bus Station at Chatham, which is leased and operated by M&D, noting the Government's concern that after deregulation major bus stations should be operated in a way which allows equal opportunity of access for all operators. We consider that the terms and conditions under which M&D is currently offering access do not provide entrants with reasonable facilities or the security of enjoying them, and deny passengers the benefits and convenience of choice from a range of services at the bus station. We conclude that the failure by M&D to offer reasonable access operates or may be expected to operate against the public interest. We recommend that M&D should allow competitors' services equal access to the Pentagon Bus Station on reasonable terms, if necessary by surrendering a bay to competitors' commercial services and by rearranging or removing some of its own operations.

We recommend that the Director General of Fair Trading should seek undertakings on all these matters from M&D.

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