Extended Essay final draft

Tianzhi Lu (Peter Wang) | Candidate number: 006341-0001 Kristiansand katedralskole Gimle

EXTENDED

ESSAY IN

ECONOMICS

TO WHAT EXTENT IS THE CURRENT MARKET

STRUCTURE THE OPTIMAL WAY OF

ORGANIZING PUBLIC TRANSIT IN MY

REGION OF NORWAY (KRISTIANSAND)?

13-09-2013 Final draft

Word count: 3993 words

Supervisor: Birthe Fennefoss

09-2013 Tianzhi Lu (Peter Wang) 006341-0001 EE in Economics

1

1. Abstract

This Extended Essay investigates the research question: “to what extent is the

current market structure the optimal way of organizing public transit in my region

of Norway (Kristiansand)?”.

During the investigation, I selected sources that enabled me to evaluate the

optimality of monopoly from the perspectives of producers, consumers and market as a

whole. First, I conducted an interview with the Chief of Research & Development

Thomas Ruud Jensen in Agder Kollektivtrafikk AS (AKT, Agder Collective Transport) in

order to explore the monopolist’s stance on different aspects of the market. Secondly,

an electronic questionnaire was distributed to residents in Kristiansand in order to

determine commuters’ travel habits and quantize their satisfaction with bus service.

Furthermore, many secondary sources were consulted, such as annual AKT reports,

Nettbuss reports and publications from the Norwegian Public Roads Administration and

the Norwegian Centre for Transport Research. Moreover, I employed economic theories

within the theory of the firm during the investigation as well.

Several conclusions were made from the quantitative and qualitative findings of

my investigation. First, due to the characteristics of a natural monopoly and the effect of

competition on price, it can be concluded that the presence of only one firm in this market

is a premise for the structure to be socially optimal. Secondly, due to the process of

tendering by cost and strong economies of scale possessed by Nettbuss, the current

structure is highly productively efficient. However, the market is hardly allocatively

efficient due to a socially non-optimal allocation of production factors, poor consumer


2

satisfaction, pricing strategies with both inefficient elements and considerable room for

improvement and an inefficient level of subsidies. The answer to a socially optimal

structure is a less regulated monopoly where the tendering assesses both cost and

quality of supplying bus service.

Word count: 295 words


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Table of Contents

1. Abstract ................................................................................................. 2

2. Introduction ........................................................................................... 4

3. Structure of public transit market in Kristiansand ............................. 5

4. Hypothesis ............................................................................................. 7

5. Methods of investigation ...................................................................... 7

6. Data and analysis .................................................................................. 8

6.1 Natural monopoly ....................................................................... 8

6.2 Efficiency and welfare ............................................................. 11

6.3 Profit and subsidies ................................................................. 16

6.4 Price .......................................................................................... 19

6.5 Consumer experience .............................................................. 22

7. Conclusion .......................................................................................... 27

8. Bibliography ........................................................................................ 29

9. Appendices .......................................................................................... 31


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2. Introduction

In this fast-paced society, collective transport such as bus, subway and tram

plays a cardinal role in the daily life of urban residents. In the Kristiansand municipality,

capital of the Vest-Agder County in Norway, many people are entirely dependent on bus

service for daily commuting – in 2012, a total of 8,734,000 passengers1 were

transported by buses within Kristiansand regions. However, I have experienced that

opinion on public transit is extremely polarised – many commuters are dissatisfied with

the service, while others show gratitude. Furthermore, local debates on the most optimal

market structure of organizing public transit arose from a recent reintroduction of a true-

time system by the bus company Agder Kollektivtrafikk AS (AKT, Agder Collective

Transport) after a complete fiasco of the first introduction for a decade ago.

Consequently, due to the aforementioned factors, it is now essential for the local

communities in Kristiansand to understand the current structure of collective transport

and evaluate its efficiency in providing society with high-quality transit. In order to

analyse that, research question “to what extent is the current market structure the

optimal way of organizing public transit in my region of Norway (Kristiansand)?”

was formulated. This question will be investigated using economic theories such as

price elasticity of demand, theory of the firm, price discrimination, allocative/productive

efficiencies, market failure etc.

1 Agder Kollektivtrafikk AS (AKT), Annual report 2012, P19


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3. Structure of public transit market in Kristiansand

Chart 1.1 - structure of the Kristiansand collective transport market 2

2 Thomas Ruud Jensen (Vice Executive at AKT), interview, Kristiansand, June 2013

Central administration and Vest-Agder county administration

Norwegian central administration and Vest-Agder county

administration have the overhead political responsibility over

collective transport in Vest-Agder, which includes strategic

decision-making, drafting of general statutes and financial support

for operations of AKT.

AKT

AKT is a state-owned company solely

responsible for the supply of public

transit in the Vest-Agder county and

other related services. It was

established in 2007, and its shares are

owned by the Vest-Agder county (66%)

and Kristiansand municipality (34%).

Nettbuss Sør AS

AKT does not directly supply the bus service

itself. It employs another company Nettbuss

Sør AS (Nettbuss South AS) to deliver the

service by using open tendering, where the

project is published and firms compete with

their best offers to obtain the entire bid of the

Kristiansand public transit production for a

period of several years.

Consumers

Nevertheless, both companies are in direct contact with the

consumers: AKT meets passengers at product combination,

prices, advertising, provision of information etc., while Nettbuss

meets consumers with their buses and bus drivers1.

Tendering


6

Consequently, we can conclude that the structure of public transit market in

Kristiansand is a monopoly, which is defined as a market structure with only one firm in

the industry. Even though there is collaboration between AKT and Nettbuss, these two

companies together behave as one single firm because Nettbuss delivers production for

AKT while the latter is in charge of all other aspects of production. Such a monopoly has

two assumptions:

1. Only one supplier but many consumers

2. Strong (legal) barriers to entry that stop new firms from entering the market.

Economic profit is the difference between total economic cost (both explicit cost

and opportunity cost – the next best choice foregone when an economic decision is

made) and total revenue of producing/selling a certain amount of output. A monopolist

like AKT usually attempts to maximize profit by producing at the level of output where

marginal cost (MC, extra cost of producing an additional unit of output) = marginal

revenue (MR, extra revenue received for an extra unit of sales). Abnormal profit is made

when total revenue exceeds total economic cost. When a monopolist makes abnormal

profit, due to the high barrier to entry, it is able to keep this profit in both the short run

(time period in which at least one production factor is fixed) and the long run (time period

in which all production factors – land, labor, capital and management - are variable,

except for the state of technology). 3

3 Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P95


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4. Hypothesis

Before I started field research, I hypothesized this monopolistic structure to be

non-optimal for all stakeholders based on the economic theory of monopoly:

First, I assumed that AKT was producing at the profit-maximizing level of output,

thus believing that it was able to charge a higher price for a lower output. Secondly, I

conjectured that due to the presence of strong legal barriers to entry, there is no

incentive for AKT/Nettbuss to be cost-efficient in their production and research and

development (later referred to as R&D). Thirdly, due to the widespread low satisfaction

in bus service within my circle, I was confident in believing that AKT delivers low-quality

service as well.

However, I ruled out the possibility of perfect competition (market structure with

many small firms), much due to a small market size and difficulty of coordination among

firms during production. Therefore, I conjectured that the optimal market structure

would be a more competitive market with a few producers.

5. Method of investigation

Since my research question covers the entire market, I selected both primary and

secondary data sources so that I can acquire a detailed account of the structure and

evaluate the monopoly’s optimality from the perspectives of producers, consumers and

market as a whole.


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Primary research:

1. An interview with the Chief of R&D Thomas Ruud Jensen in AKT in order to

investigate different aspects of its production. The interview was held on 5th June

and lasted for 90min.

2. A questionnaire, attached as an appendix, was distributed electronically to residents

in Kristiansand. It attempted to determine commuters’ travel habits and quantize

their satisfaction with the bus service. The questionnaire was online for 11 days and

attracted 406 respondents.

Secondary research: Various reports/journals were consulted to expand my

understanding of the market’s national/local context (full list in bibliography).

6. Data and analysis

In this section, I will employ quantitative/qualitative findings of my investigation to

address the research question and analyze the current structure’s optimality from five

aspects: natural monopoly, efficiency and welfare, profit and subsidies, price,

consumer experience.

6.1 Natural monopoly

A natural monopoly is an industry in which a firm can produce entire output

demanded by the market at a cost lower than one with the presence of several firms.

This structure most likely arises when there are strong economies of scale in the market

(economies of scale: reduction in long-run average costs of a firm due to increased

output). Economies of scale are in turn originated from high fixed costs of production


9

(cost of employing fixed assets). Consequently, markets of public utilities (e.g. electricity,

water supply, telephone service) are usually naturally monopolistic due to high

maintenance costs of the infrastructure

employed in production (e.g. electricity cables,

pipelines, draining system).4

This principle can be illustrated by a

graph. In this graph, the industry’s monopolist

has a demand curve D1 and a LRAC curve (a

curve showing the lowest possible average

cost that can be attained by a firm in the long

run). The firm is thus able to make abnormal

profit between output q1 and q2. If another firm

enters the market, individual demand will shift to D2 because market demand is now

shared by both firms. Now that D2=AR2 is lower than LRAC, neither of the firms would

be able to make any profit when the market becomes more competitive.5

So, to what extent is the public transit market in Kristiansand a natural monopoly?

4 Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P113-114

5 Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P113-114

@ Blink, Jocelyn, and Ian Dorton. Economics

Course Companion, P113


10

First, public transport market in Kristiansand has a small size, and the population

density is relatively low in the municipality

compared to other Norwegian cities6 - this

is a crucial factor in triggering a natural

monopoly. If the market demand is small

relative to the size of the minimum efficient

scale (the level of output that minimizes

average cost) of an individual firm (MES1),

one firm alone will be able to satisfy

market demand, and a monopolistic structure is likely to occur. Conversely, if market

demand is large relative to the MES of a firm (MES2), a large number of firms are

required to satisfy demand. 7

Secondly, in order to determine this market’s extent of natural monopoly, we

should measure the monopoly power of AKT and Nettbuss. Monopoly power is defined

as the ability to set the price over the marginal cost of production, and it can be

quantized using the Lerner Index, which is determined by L =

= -

(price

elasticity of demand: a measure of how much quantity demanded of a product changes

when there is a change in the product’s price)8. In other words, the more price-inelastic

demand for public transit is, the higher the value of L and the stronger the monopoly

power.

6 Thomas Ruud Jensen (Vice Executive at AKT), interview, Kristiansand, June 2013

7 Hal R. Varian, Intermediate Microeconomics: A Modern Approach (New York: W.W. Norton & Company, 2010),

P355

8 Robert S. Pindyck and Daniel L. Rubinfeld, Microeconomics (New jersey: Pearson Education, 2008) P363


11

According to a study done by the Norwegian Centre of Transport Research, the

value of PED for bus service in Kristiansand is inelastic: –0.429. Hence, Lerner Index is

2.38, which indicates that AKT and Nettbuss possess strong monopoly power due to its

inelastic demand.

In conclusion, due to the relative position of demand to MES and the strength of

monopoly power, it can be stated that the Kristiansand public transit market is naturally

monopolistic to a high extent. Consequently, according to the theory of natural monopoly,

this current way of organizing public transit is more optimal than a relatively

competitive structure in this particular perspective.

6.2 Efficiency and welfare

6.2.1 Productive efficiency

Productive efficiency occurs when a firm produces

at its minimum average cost (AC, average cost of

producing an unit of output). Since MC curve intersects

AC at its minimum point, productive efficiency occurs at

MC=AC.10 Since Nettbuss South is solely responsible for

production of bus service in Kristiansand, productive

efficiency will be evaluated from Nettbuss’s perspective.

9 Alberte Ruud, Nils Fearnley, Katrine Næ ss Kjørstad, The market for urban public transport: Facts and examples, ed.

Trine Hagen (Oslo: December 2005), P31 10

Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P108

@ Blink, Jocelyn, and Ian Dorton.

Economics Course Companion, P108


12

6.2.1.1 Tendering process

AKT employs another company to supply public transport by using open

tendering. The most recent tendering took place in November 2009, where the supply of

collective transport in the Kristiansand region was divided into 2 packages and opened

up for competition11. The only criterion was the total annual cost of supplying a given

level of public transport in Kristiansand - the company that offered the lowest cost would

therefore win. 5 companies competed for the two packages, and Nettbuss Sør AS won

both by a significant margin12.

Since the goal of this tendering-by-cost structure is to achieve the lowest possible

average cost of production, competing firms will attempt to increase their internal

productive efficiency to be able to give the best offer. This will thus increase the

structure’s productive efficiency. Research has also shown that when Norwegian

counties decided to replace state-run government agencies with private firms in the

actual production of public transit by employing the tendering procedure, total costs

decreased by 10% and annual subsidies were reduced by 70%13 - this demonstrated

that tendering-by-cost has contributed to increase the level of productive efficiency in

Norwegian transit markets.

6.2.1.2 Economies of scale

As a matter of fact, Nettbuss is the biggest bus company in Northern Europe with

13 subsidiaries. Nettbuss has a 30% market share in the Norwegian public transit

11

AKT, Annual report 2010, P35 12

Thomas Ruud Jensen (Vice Executive at AKT), interview, Kristiansand, June 2013 13

Bård Norheim and Alberte Ruud, Kollektivtransport: utfordringer, muligheter og løsninger for byområder (Oslo: November 2007), P29


13

market: it operates in 11 of the 19 counties and many big Norwegian cities14. The size of

this company has many implications on productive efficiency.

First, the company will benefit from significant economies of scale. A growing size

(q1→q2) will help the firm gain cost advantage from e.g. specialization of management

team, bulk buying (discounts from their

suppliers in the acquisition of production

factors) and increasing focus in R&D15.

As a result, LRAC will decrease

(C1→C2), which in turn increases the

market structure’s productive efficiency.

All in all, it can be safely

concluded that the tendering-by-cost

structure and significant economies of scale make the current market structure

highly productively efficient.

6.2.2 Allocative efficiency

Allocative efficiency occurs when suppliers are

producing the optimal mix of goods/services required by

consumers. Since price reflects the value placed on a

good and MC reflects the cost to society of producing a

14

Nettbuss AS, Annual report 2011, P3-P9 15

Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P85-87

@ Blink, Jocelyn, and Ian Dorton.

Economics Course Companion, P109


14

good, allocative efficiency occurs when MC=P=AR. 16

Since AKT’s main strategies for defining its level of output are: 1) mobility for all 2)

attractive service with high frequency/accessibility17, it can be established that AKT’s

goal is to be allocatively efficient because it attempts to produce at the socially optimal

level of output. So, to what extent is AKT allocatively efficient?

As a matter of fact, almost all aspects of the public transport production are pre-

decided by AKT: price, frequency, geographical extent, routing, marketing strategies,

bus vehicles etc. This is negative for several reasons.

First, arbitrarily planning these factors will not provide the production firm

(Nettbuss) with incentives to find creative market solutions/ideas that make public transit

more attractive to potential consumers.

Secondly, a state-run enterprise will most likely fail to plan these aspects of

production exactly at the socially optimal

level due to its lack of market experience.

In this way, resources are not allocated

efficiently and welfare losses will be

incurred on the society. This reasoning is

supported by consumers’ dissatisfaction

with prices, frequency and geographical extent in my questionnaire seen from Table 1.2.

Conversely, privately run firms like Nettbuss with more experience/expertise in the

national market are more capable of determining the allocatively efficient level of the

16

Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P109 17

Thomas Ruud Jensen (Vice Executive of AKT), interview, Kristiansand, June 2013

Aspects of production

that AKT regulates

Average satisfaction level

(1: least satisfied, 7: most

satisfied)

Single-ticket prices 2.7

Card prices 3.4

Frequency 3.5

Geographical extent of

routes

3.8

Table 1.2


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different aspects of production. As a result, if Nettbuss is more involved in deciding e.g.

frequency and pricing strategies, the market structure will presumably be more

allocatively efficient. Examples of creative pricing strategies that private firms might

employ include peak-load pricing (charging a lower price for rush-hour routes to alleviate

traffic jams), bundling two or more products into a package etc.

Integrating private firms in the decision-making process can be done by

introducing a tendering procedure that assesses the quality of competing firms’ offers to

supply public transit service. An attempt of bidding by quality was undertaken in

Grenland in the Telemark county. A company won the bid by developing an elegant

transit concept of “metro-shuttle-school”, which created a 15% increase in number of

passengers already in its first year18.

To summarize, the current market structure is allocatively inefficient in

terms of defining the level of various aspects of production.

18



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6.3 Profit and subsidies

In this sub-section, I will evaluate the monopoly’s efficiency by examining profits

and subsidies.

6.3.1 Subsidies

From Table 1.3, we can determine the ratio of total subsidies to total operating

costs in 2012 to be approx. 67%. So, is this level of subsidy socially optimal for the

Kristiansand public transit market?

First, according to Table 1.4, Vest-Agder county administration contributes

approx. 67% of a total of 226 million kroners granted to AKT in 2012. However, it is

doubtful whether or not the administration has enough knowledge about the market to

19




AKT, Annual report 2012, P16

Amount (million Norwegian kroners)

Total subsidies 22619

Total revenue 11820

Total costs 33821

Subsidies from government

agencies in 201222

Amount (million Norwegian kroners)

Vest-Agder county administration 152

Municipalities in Vest-Agder 50.5

Central administration 23.5

Table 1.3 – AKT’s finances in 2012

Table 1.4 – Subsidies granted to AKT in 2012


17

positively influence total amount of subsidies. Even though there is evidence for

collaboration between AKT and the county administration23, there is a significant chance

that politicians underestimate/overestimate the importance of public transport in local

communities. As local public transit markets are not prioritized correctly, an inefficient

allocation of financial resources will follow.

Secondly, according to a recent study, public transit markets in Norway are

generally under-financed24. This view is supported by AKT when the service was

weakened as a result of a widened gap between cost and subsidies in 200825.

Additionally, AKT attributed its reluctance to increase output/decrease prices in 2012 to

potential financial uncertainties in 201326. Hence, the level of subsidies is not allocatively

efficient since cost to the society of this production is lower than the benefit of public

transport to consumers. As a result, this merit good (provide benefits to both consumers

and society as a whole) will be underprovided/under-consumed due to a lack of financial

resources. Moreover, low level of subsidies will increase bus prices and trigger an

increase in usage of private cars and thus welfare losses from pollution.

Hence, the current market structure is non-optimal in regulating ratio of

subsidies to cost. Subsidies granted to AKT should be cautiously increased in order to

encourage a higher output and to obtain a potential welfare gain from this merit good

with positive externalities of consumption (consumption of a product has a positive

external benefit on third parties). However, higher level of subsidies might grant AKT

23

AKT, Annual report 2012, P29 and P31 24

Silvia J. Olsen, Knut S. Eriksen, Nils Fearnley, Frode Longva, Funding public transport in Norway (Oslo: October 2011), P60 25




18

incentives to be inefficient in allocating financial capital. A solution to this will be to

assign subsidies to finance specific research/production projects to ensure a correct

allocation of resources.

6.3.2 Profit

Instead of profit-maximizing at MC=MR, AKT’s long-run goal is to be allocatively

efficient and to make normal profit32. However, according to Table 1.5, AKT has earned

abnormal profit in all years except when it was first established in 2008. As a young firm

established only 6 years ago, all abnormal profit earned throughout these years is stored

as equity capital so that AKT is able to handle unforeseen fluctuations in market demand

and in level of subsidies without weakening the bus service33. Furthermore, this capital

can be used to finance R&D projects. Therefore, the level of profit earned by the

market’s monopolist is highly socially optimal.

27






Thomas Ruud Jensen (Vice Executive of AKT), interview, Kristiansand, June 2013 33


2008 2009 2010 2011 2012

Profit (million

Norwegian

kroners)

-6.527 8.828 4.329 10.430 12.631

Table 1.5 - amount of profit/losses earned by AKT since 2008


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6.4 Price

6.4.1 Second-degree price discrimination

One of AKT’s most campaigned price-strategies is to encourage the use of bus

cards instead of single tickets. As a

matter of fact, one single trip on a

“20-trip flexi-card” costs 20 kroners

in average, while an adult single

ticket usually costs 38 kroners34.

Since bus card users travel more

often than customers purchasing

tickets, AKT rewards the former

with a significant price-advantage –

i.e. second-degree price discrimination. This strategy thus stimulates higher demand by

providing people travelling often with price incentives. Moreover, since purchasing single

tickets will delay buses at the stops, a quick card-swipe is preferred from the perspective

of regularity/punctuality35.

On the other hand, research has shown that market potential is greatest with

those who take buses “from time to time”36. However, even though flexi-card is

designed for that specific consumer group, my survey demonstrated that 54% of people

who take the bus “once or more per week” or “2 -3 times per month” pay with single-

34

AKT, http://www.busskort.no/Article.aspx?m=169&amid=6151 (accessed 23rd June 2013) 35

Thomas Ruud Jensen (Vice Executive of AKT), interview, Kristiansand, June 2013 36



20

tickets while only 22% of them use flexi-cards. Additionally, my survey demonstrated

that average satisfaction for single-ticket prices is extremely low: 2.7 (1 being least

satisfied and 7 being most satisfied). Hence, second-degree price discrimination has

made the relative price of single-tickets so high that the customer group with the

greatest market potential is scared away by these prices before they become familiarize

with flexi-cards. It can be thus concluded that the current level of second-degree

price discrimination is non-optimal and should be toned down by cautiously

reducing single-ticket prices.

6.4.2 Third-degree price discrimination

Third-degree price discrimination takes place when consumers are identified in

different market segments, and a separate price is charged in each segment in

accordance with its PED value37. For instance, a 30-day period card costs 320kr for

children (4-15), while 760kr for adults (30-66)38 – the latter with higher incomes is less

responsive and more tolerant to higher bus prices (inelastic demand) than the former.

Third-degree price discrimination is positive for increasing efficiency within

pricing in the current structure because all customer groups will theoretically obtain

the price that they are willing/able to pay. In this way, AKT will gain an appropriate

amount of revenue from each consumer group, thus increasing its economies of scale.

However, since all prices are internally set by AKT, it is very likely that the firm is unable

to set the price at the socially optimal level for each consumer group.

37

Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P135 38

AKT, http://www.busskort.no/Articlelist.aspx?m=191 (accessed 21st

June 2013)

http://www.busskort.no/Articlelist.aspx?m=191


21

6.4.3 Implications of competition on the level of price

If competition is introduced in this market, this industry with substantial

economies of scale will become an oligopoly - a market structure consisting of a few

firms with lower economies of scale individually. As a result, total MC1 curve in an

oligopoly will be higher than the MC2 curve of a monopoly due to higher average costs of

production. Firms in an oligopoly will produce at MC=MR to maximize profits, while AKT

will attempt to produce at MC=AR to be allocatively efficient. Therefore if competition is

introduced, output will be reduced (q2→q1) and price will increase (P2→P1).39

Furthermore, private firms will have to pay taxes to the administration – as

opposed to the current structure where the state-owned AKT does not pay tax.

Additionally, private firms will receive fewer subsidies from the government than AKT

39

Jocelyn Blink, Ian Dorton, Economics Course Companion, (Oxford: Oxford University Press, 2011), P118


22

does. All in all, level of price will be more optimal for consumers in the current

structure than in a competitive one.

6.5 Consumer experience

6.5.1 Consumer satisfaction

6.5.1.1. AKT

We see that satisfaction with AKT’s work is varied: customers are dissatisfied with

almost all planning factors, while relatively satisfied with information and payment

system. The average satisfaction level is 3.8 - this indicates that there is an enormous

room for improvement.

Aspects of public transit in Kristiansand Average satisfaction level

(1: least satisfied, 7: most satisfied)

Single-ticket prices 2.7

Card prices 3.4

Travel time 4.1

Frequency 3.5

Geographical extent of routes 3.8

Information 3.9

Simplicity of the payment system 5.2

Average 3.8

Table 1.6 - results from my questionnaire that assesses consumer satisfaction with

AKT’s work


23

6.5.1.2 Nettbuss

According to AKT, average customer satisfaction hit a record-low when Nettbuss

took over production in 201140. As a result, due to the strong dissatisfaction with

punctuality, when people were asked whether or not they would like Nettbuss to be the

operator of buses in Kristiansand, 88% answered “no” or “uncertain” while only 12%

answered “yes”.

40

Thomas Ruud Jensen (Vice Executive at AKT), interview, Kristiansand, June 2013

Aspects of public transit in

Kristiansand

Average satisfaction level

(1: least satisfied, 7: most satisfied)

Punctuality 3.1

Safety 4.9

Driver’s attitude 3.6

Cleanliness / maintenance of buses 3.9

Average 3.9

Table 1.7 - results from my questionnaire that assesses consumer satisfaction with Nettbuss’s

operation


24

9031

8923

8564

8668

8511

8734

8200

8300

8400

8500

8600

8700

8800

8900

9000

9100

2007 2008 2009 2010 2011 2012

Total annual passengers in Kristiansand region

Passengers in 1000

Linear (Passengers in 1000)

6.5.1.3 Market as a whole

The quality of work done by all supply-side stakeholders is also reflected in the

total number of passengers transported within the Kristiansand region annually41 42.

From the graph above, a clear decreasing trend can be observed throughout the years,

which illustrates a relatively low quality of service by AKT and Nettbuss combined.

To summarize, the current market structure is non-optimal in terms of

relatively low recognition/satisfaction from the consumers.

41




25

6.5.2 Research and development

As a matter of fact, AKT has heavily concentrated on R&D in recent years. The

most essential project is the development of a true-time information system, which is

essentially a GPS that registers where a bus is located and provides passengers with

information on when the bus arrives at a certain stop. This information is now available

@ Agder Kollektivtrafikk AS 2013


26

via displays in buses, bus stops and a mobile app with both true-time info and trip

planner. This project started in fall 2012 and came online on 4th September 201343.

This system was also well-received by customers: My questionnaire

demonstrated that 85% of the sample was optimistic about the

project, while another study suggested that 41% of people in

Kristiansand predicted that the true-time system will make them

use public transit more often44.

Additionally, AKT has completed other projects that aimed

at cash-free buses in Kristiansand45, such as developing a mobile

ticket app and installing bank terminals in all buses.

To sum up, AKT is strongly capable of conducting

R&D projects that are both socially optimal and well-suited for consumers.

43

AKT, Sanntid – En bedre bussopplevelse, http://akt.no/info/reise/sanntidsinformasjonssystem/?contrast=false (accessed 12th September 2013) 44

Alberte Ruud, Nils Fearnley, Katrine Næ ss Kjørstad, The market for urban public transport: Facts and examples, ed. Trine Hagen (Oslo: December 2005), P20 45


@ Agder Kollektivtrafikk AS, 2013


27

7. Conclusion

Now that the optimality of the current structure of the Kristiansand public transit

market has been investigated from five aspects, we should return to the RQ and draw a

conclusion from the findings.

First, it was concluded in section 6.1 that the market is highly naturally

monopolistic, which implies that a monopoly in this market will be more cost-efficient than

any other forms of competition. Secondly, it was observed that a relatively competitive

structure will lead to high bus prices. Therefore, it can be safely concluded that the

presence of only one firm in this market is a premise for the structure to be socially

optimal.

Secondly, due to the process of tendering by cost and strong economies of scale

possessed by Nettbuss, the current structure of supplying public transit is highly

productively efficient.

However, the structure is hardly allocatively efficient. Since almost all aspects of

production are planned by a state-run firm with relatively little market expertise, it is

highly doubtful that production levels can be set at the socially optimal level. This is

supported by both a poor consumer satisfaction from the survey that I conducted and a

pricing strategy with both inefficient elements (second-degree price discrimination) and

considerable room for improvement. Furthermore, level of subsidies granted is not

allocatively efficient either. Nevertheless, despite its weaknesses, AKT is efficient in its

profit-earning and conducts high-quality R&D projects.


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So, what would be a structure that secures both allocative and productive

efficiency? Contrary to my hypothesis, the answer is a less regulated monopoly

where the tendering assesses both cost and quality of supplying bus service. For

the structure to be more allocatively efficient, the firm that wins the bid should be given

more freedom in developing pricing concept, frequency, route-planning etc. However, the

government should still regulate the monopolist in profit-making and level of output so

that the firm prioritizes interests of the people in all circumstances.

Despite the conclusions, the investigation had some limitations. First, the sample

space of my questionnaire was too focused in one single demographic group – 91% of all

respondents were teenagers from 14 to 19 years old. Hence, the opinion of other age

groups was underrepresented. Secondly, I wasn’t able to appoint an interview with

officials from Nettbuss – this might have affected the efficiency of my analysis.

Ultimately, the analysis had one underlying assumption: the structure possessed a

perfect flow of information between stakeholders. The impact of perfect/asymmetrical

information on the market structure could have opened up for a further evaluation of its

efficiency.


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Bibliography

Varian, Hal R.. Intermediate Microeconomics: A Modern Approach. 8th ed. New York:

W.W. Norton & Company, 2010. Print.

Pindyck, Robert S., and Daniel L. Rubinfeld. Microeconomics. 7th ed. New Jersey:

Pearson Education, 2008. Print.

Blink, Jocelyn, and Ian Dorton. Economics Course Companion. 2nd ed. Oxford: Oxford

University Press, 2011. Print.

Ruud, Alberte, et al. The Market for Urban Public Transport: Facts and Examples. Oslo:

TØI, 2005. Web.

Olsen. Silvia J., et al. Funding Public Transport in Norway. Oslo: TØI, 2011. Web.

Ruud, Alberte, and Bård Norheim. Kollektivtransport: Utfordringer, Muligheter og

Løsninger for Byområder. Oslo: Norwegian Public Roads Administration, 2007. Web.

Nettbuss AS. Årsrapport / 2011. Oslo: Nettbuss, 2011. Web

Agder Kollektivtrafikk AS. Årsrapport 2012. Kristiansand: AKT, 2012. Web.






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AKT. “Priser for reiser i Kristiansandsområdet”. Web. Accessed 21st June 2013

<http://www.busskort.no/Article.aspx?m=169&amid=6151>

AKT. “Busskort for Agderfylkene”. Web. Accessed 23rd June 2013

<http://www.busskort.no/Articlelist.aspx?m=191>

AKT. “Sanntid – En bedre bussopplevelse”. Web. Accessed 12th September 2013

<http://akt.no/info/reise/sanntidsinformasjonssystem/>

9. Appendix 1 – interview with AKT

As the interview with AKT was not a direct exchange of questions and answers, but

rather a conversation about the collective transport market in Kristiansand in general, a

transcript of the interview will not be provided.

The interview began at 10 a.m. on 5th June 2013, and lasted for approximately 90

minutes. The interview was held in the headquarters of Agder Kollektivtrafikk AS -

Vestre Strandgate 33, 4611 Kristiansand, with the Vice Director and Director of

Research and Development of AKT Thomas Ruud Jensen.


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9. Appendix 2 - questionnaire


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9. Appendix 3 – questionnaire report


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Extended Essay final draft

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Transcript of Extended Essay final draft