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IV. PROBLEMS WITH "FREE COMPETITION" IN URBAN TRANSIT

Can we expect smooth coordination and felicitous metacoordination from such a picture? The door-to-door services would seem to pose no particular problem, but the line-haul and fixed-route services may experience trouble. Scholars have raised a number of concerns about the performance of free competition in transportation services. I will review them here.

One line of attack emphasizes poor consumer information about contending service providers. There are peculiar difficulties of price competition in the transit industry. Many riders are non-repeat customers traveling from airports, hotels, and resorts; non-repeat customers are poorly informed and vulnerable to others. In communicating the fare, there is ambiguity about whether to express the charge per mile or for the complete trip. And either alternative might entail further ambiguities. There is an awkwardness in "shopping around," since the communication often takes place within the vehicle and causes delays for other passengers (see Frankena and Pautler 1986 and comments by Robert Samuels). These problems might help to explain why there has been surprisingly little price competition in deregulated bus and taxi markets (Frankena and Pautler 1986, 3; Dodgson and Katsoulacos 1991; White 1995, 198). These problems also apply to some extent to competition in quality characteristics. Furthermore, there is the problem of trustworthiness, and incidents of "rip-offs" and crime sometimes occur in taxi markets. Because of the abnormalities of consumer information, there is an argument for alleviating the uncertainties and anxieties by having regulators control entry and set uniform prices.

A second line of attack on free-market transit is the argument from economies of density. Although it is agreed that bus service does not show economies of scale in production (Viton 1981; Hensher 1988; Shipe 1992), there are nonetheless systemwide gains from increased volumes. Part of the gains may come in the form of lower production costs, due to larger vehicles, but part accrues to riders in the form of higher frequencies, shorter waiting times (Mohring 1972), and a denser route structure (Gwilliam et al 1985). Christopher Nash (1988, 118) argues that the free-market process of "piecemeal infilling of gaps" will not successfully achieve economies of density because some of the benefits flowing from volume-enhancing actions accrue beyond the calculus of piecemeal operators; they neglect consumer surpluses and other benefits that accrue in other pieces of the system. Due to density externalities, the incentives that advance Hayekian metacoordination are not functioning properly.

Another criticism maintains that piecemeal operators in a free market will inevitably be disjointed. They will fail to coordinate schedules and to achieve smooth through-ticketing and interchange. This is a problem of Schelling coordination. Riders will be frustrated in connecting the pieces of their journey, and will have to make a separate transaction for each piece. Nash (1988, 114) argues that again there are systemwide benefits from through-ticketing schemes that the piecemeal operator would ignore. Nash combines this coordination argument and the density argument to make a case for transit "integration," or central planning.

Another issue is the provision of passenger facilities, like benches, shelters, stations, and signage, which are an important complement to transit services. When carriers operate under laissez-faire, local authorities might have difficulty coordinating the provision of these facilities. The operators might lack an impartial representative to work with the local authorities, and the laissez-faire market might itself be in constant flux. Waiting passengers might begin to congregate at inappropriate locations, blocking sidewalks, driveways, or storefronts.

Another concern is that of "cut-throat competition," an idea originally developed in the context of railroads and public utilities (Keeler 1983, 22, 47). The argument maintains that in an industry with high fixed cost and low marginal cost, competition may drive firms to cut prices to such low levels that costs cannot be recouped. The argument is like the natural monopoly argument, except that there is no premise that the optimal number of firms, in a blackboard sense, is one. Bus service does not display the economies of scale associated with natural monopoly. Nonetheless, the cut-throat competition notion may be relevant on individual routes, or on a systemwide basis once the total costs of establishing schedules, consumer information, and public awareness are included (Savage 1986; Nash 1988, 112).

The storyline of the cut-throat competition argument is indefinite. Suppose Company A sets up a bus system. Perhaps there is call, in a blackboard sense, for a second firm. Company B enters, but the tendency toward price cutting is too strong, and both firms are ruined. This scenario conforms to Marx's words about "periodical convulsions" and "the most outrageous squandering of ... the social means of production." In reviewing bus service in Britain, Peter White (1995, 206) speaks of "the instability and wasteful duplication found in deregulated areas" (although price cutting has not been common).

Variations on this story of cut-throat competition are, first, that Company B is smart enough not to enter, in which case Company A enjoys an unrestricted monopoly. Since it is free to revise its price downward in the event of entry, there in not much discipline exerted by "contestability," or hit-and-run entry. Another variation is that Company B enters and the firms recognize that there is neither profit nor sport in cut-throat competition, and manage to collude. In these cases, we get prices well above marginal cost and a highly inefficient contraction of ridership. Indeed, foes of free-market transit often argue that urban transit ought to charge very low prices and receive subsidies.

Then there is a final fateful argument against unrestricted competition: interloping. A company may take pains to establish some viable bus routes, but then interlopers in banged-up old vans -- that is, competitors! -- come around and collect the waiting passengers just before the scheduled service is due to arrive (Eckert and Hilton 1972; Roth and Wynne 1982). This will upset coordination in that the scheduled vehicle is harmed by the interloper activity, and, if such activity forces the scheduled service to give up the route, passengers for a time may suffer discoordination by waiting for a bus that never arrives. Entrepreneurs might know that if they were to attempt to set up a bus route, the interlopers would only descend to "skim the cream" and ultimately destroy what had been created. In consequence, no one sets up a service, no one interlopes, and no one waits to be picked up. This would be a coordination equilibrium, but obviously a poor result in terms of metacoordination. We can also imagine competing van drivers battling for customers on the line-haul routes, driving dangerously and becoming agitated (Grava 1980, 286). There might be ugly incidents such as fist-fights at the curb. Perhaps hot-tempered van drivers would from time to time run down a pedestrian.

Having reviewed several arguments against free-market transit, we can see why such a regime is often rejected by urban transportation planners. It is particularly easy to reject Hayek's philosophy when the word "coordination" is read to mean Schelling coordination. Urban planners can make a plausible case that free competition will not result in a smooth fulfillment of plans. As for metacoordination, they can well argue that Hayek's apparent prescription will be untenable because of poor consumer information and services, suboptimal route structures, disjointed pieces, destructive competition and interloping. On this ground transportation planners opt for centralized integration, "taking [urban transit] under their own control and putting an end to the constant anarchy ... of capitalist production" (Marx 1871, 213).

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