Singapore’s Public Transport – The Problem With Monopoly

There have been a lot of talk on Singapore’s public transport and while the Government’s keen to keep the status quo on their policies and stance, they are facing increasing pressure from opposition parties to nationalise public transport or to liberalise the public transport. Mr Lui, our Minister of Transport has retorted that liberalisation would lead to cherry-picking and nationalisation would lead to inefficiency. While his arguments may carry some weight, the current system is not exactly flawless as well. In fact, the current systems are presenting the very problems that he is trying to avoid in his arguments against NSP and WP.

The operating cost of public transport goes up as they supply more services. Cost comes from fuel, wages, capital assets etc

Exhibit 1: The operating cost of public transport goes up as they supply more services. Cost comes from fuel, wages, capital assets etc.

In exhibit 1, we can see that an operator’s cost would increase as they try to increase the amount of services. When an operator increases the frequency, it will increase the operating cost and it is not in the best interest of the company. The best way to have maximum profits is to squeeze as many people into as many buses/trains as possible and hence achieve the greatest efficiency of low operating cost and maximum passengers. In a perfect competition, this is not possible. Other suppliers of transport would sense an opportunity and provide services as there is profit to be made. The price and amount of services provided by the suppliers would stabilise at p1 and q1 where the operating cost of the company matches the price that the consumers would pay for public transport. At equilibrium, suppliers will not increase any additional frequency as incremental cost is more than what the passengers would pay for. Below equilibrium, the companies would still increase the frequency to capture a bigger part of the market.

Companies that innovate in perfect competition would be able to make a profit or increase market share and hence introduce the drive to cut cost

Exhibit 2: Companies that innovate in perfect competition would be able to make a profit or increase market share and hence introduce the drive to cut cost.

In the world of perfect competition, this is where the drive to innovate and cut cost kicks in. A company that has a lower cost structure would benefit at equilibrium price as they are able to either expand the market by producing more services than their competitors at any given price or produce the same level of services and make a profit from the price difference. In exhibit 2, a company with a lower cost can maintain status quo in the market and make a profit or can increase the market share while still meeting cost expectation. Without any competition, there is no real urgency to cut cost or innovate. The companies can easily pass the cost to the consumers as the consumers have no choices but to accept the cost. Even though Singapore has Public Transport Council (PTC) that regulates fare increase, the Council’s hands are quite tied as they are required to keep the companies viable.

Monopolistic practices will incur deadweight loss to the economy. Companies with monopolistic powers do not need to cut average cost to increase profits and may do so by reducing supply

Exhibit 3: Monopolistic practices will incur deadweight loss to the economy. Companies with monopolistic powers do not need to cut average cost to increase profits and may do so by reducing supply.

In monopoly, in order to make profits, the company, there is no real need to increase average operating cost. To make profits, companies can opt to decrease overall cost instead by reducing supply. This would lead to a larger profit. See exhibit 3. However, this leads to a deadweight loss to the economy. As services become increasingly scarce, they are able to price higher and cramp more people into the cabins. Even if we argue that PTC is there to moderate the price, there is also the emotional price that is not as clearly understood. Once the overcrowding or the waiting time becomes longer, people would feel that the services are overpriced and would opt for alternative (taxi, hitching a hike, buying personal transport or even walk). This deadweight loss to the economy is illustrated in the exhibit 3 and is considered a loss of welfare.

From the above analysis, we can see that having a monopoly (the current cartel behaves like monopoly) would result in complacency and do not result in cost savings. Companies will choose the path of least resistance and the easiest way to reduce cost in the example is to reduce services rather than to innovate to increase profits. Hence, the argument that profit seeking privatised companies would seek to lower cost is no longer valid in this case. In fact, the very reason for the application for fare hike is that the firms are unable to keep cost down.

Secondly, the argument of cherry picking by companies during liberalisation is also not valid. As we can see from the lack of services, the transport companies are trying to produce as many cherries as possible by reducing services and packing as many people as possible. In this case, our current companies are not just cherry picking, they are actually growing cherries.

In conclusion, there must be a way to fine tune our public transport policies. Mr Lui hit the nail when he commented that services must be improved. However, the inaction from the Ministry to translate it into actual policies to prevent our cartel of public transport providers from flexing their monopolistic powers is sadly disappointing. By spending time rebutting oppositions without providing real solutions to fix a broken system would definitely lose the nation’s support.

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Posted on August 3, 2011, in What's Happening?. Bookmark the permalink. 1 Comment.

  1. No real competition means no improvement and no ideas .

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