CONTESTABILITY OF THE GERMAN LONG-DISTANCE COACH MARKET

Katrin Augustin
KCW GmbH, Berlin

1. INTRODUCTION/BACKGROUND
The deregulation of the long-distance coach market in Germany has been
implemented on 1 January 2013 long after the first wave of liberalisation has
gone through Europe. Countries such as UK and Sweden completely opened
the market for bus services on long distances almost 30 resp. 20 years ago.
Other countries such as Spain and Norway implemented competitive
tendering procedures for this new transport segment.
Much literature exists evaluating those deregulated or partially deregulated
countries. However, not much empirically investigation exists on the
contestability of commercial long-distance coach services.
The remainder of this paper is structured as follows; we first give a brief
review about the theory of contestable markets. In section 3 we introduce the
current developments of the German long-distance coach market describing
the essential changes of the new regulatory framework. Then, I describe the
data set I use and the empirical method I have chosen, in chapter 4. Section 5
concludes the findings of the analysis.
2. THEORETICAL APPROACH
Baumol et al. (1982) defined that a contestable market is one into which entry
is absolutely free, and exit is absolutely costless.
Contestability of markets has been subject to large theoretical research based
usually on the assumption of perfect competition in its models which leads at
least theoretically to sustainable balance and economic efficiency. However,
less literature exists on econometric investigations whether industrial markets
turn out to be contestable empirically with real data. This is due to the poor
availability of data.
Nevertheless, some examples partially from cross-sectors exist. For the
aviation sector Bailey (1985) found the US aviation sector to be contestable,
but not perfectly, after deregulation, though airline markets are highly
concentrated compared to the bus industry.
Cowie (2012) comes to the conclusion that deregulated bus markets are not
contestable in the long-run. He analysed about 90 bus markets differentiating
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between dominant, contestable and competitive markets price, marginal

profits and efficiency applying amongst others data envelopment analysis
(DEA).
German long-distance coach routes vary a lot in structure (see section 4.1),
although I see no barriers to entry or exit in technological terms. Different all
kind of vehicles including various types of amenities (luxury leather seats,
extra legroom, Wi-Fi, etc.) is openly available and can be sold or used for
other services if not required any more.
In the UK and the US former monopoly positions of National Express and
Geyhound could be confirmed due to the deregulation as they enjoyed
significant incumbency advantages in terms of size and knowledge (Button,
1985, [US authorxxx]). For our analyses in section 4 I expect according to
Button (1985) the German long-distance coach market to be contestable, if
the same cost-fare relationship [] holds for each route [] irrespective of
whether actual competition exists or not. As by the market opening in
January 2013 all operators, both incumbents and new operators serving
routes solely should be forced to set lower fares in the fear of new entrants.
Though, Button (1985) using little data, shows that the UK inter-urban bus
market is contestable as the competition variable is not significant in the faresetting model. Nevertheless, fares on less concentrated bus routes are higher
than on more concentrated routes.
The hypothesis of the paper is, if the German long-distance coach market is
contestable, no significant factors on competition but only cost drivers exist.
Measuring the levels of competition in the young German market I rely on the
the Herfindahl Index as one economic indicator (Jaffer & Thompson, 1986).
3. CURRENT DEVELOPMENTS IN GERMANY
The amendment of the Federal Passenger Transportation Act (PBefG) in
January 2013 has finished 80 years of strong regulation of the German longdistance coach market on long-distances. Long-distance coach services are
now allowed to compete with rail transport services. Competing long-distance
coach services on the same route are possible. Operators are also allowed to
set up stops wherever they want to as long as road safety is assured and no
local public transport is harmed whereas before the deregulation the
determination of stops has been depending on the attitude of incumbent
operators and authorities.

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Operators still need to apply for an authorisation before they start their
services. The authorisation process for a route usually takes about three
months. There is no regulation on timetable or fare setting. However, some
market access restrictions still exist in order to protect local public transport,
which is (still) highly subsidised (see Karl 2013). Stops of coach services must
have a minimum distance of 50 km. Bus services must not be offered if
parallel regional rail transport exists with journey times up to one hour for the
distance between two stops of a bus route. Exceptions apply wherever local
public transport provides no adequate level of service or if the demand of an
existing local public transport service is not harmed significantly.
A notice on withdrawal has to be given by the operator three months before
the service expires. Another new requirement is that operators have to
implement barrier free accessibility for all passengers on coach services until
2016 for new buses resp. 2019 for all buses latest. 1
We would like to highlight particularly that German express coach services are
operating on commercial basis and no public funding is provided.
The German government reports that 23 new routes have been approved and
more than 50 authorisations have been applied for in the period between 1st
January and 15th February 2013. More recent official figures are not
available, yet.2 Overall, we estimate that more than 150 national routes are
run by 1st July 2013, not taking into account international routes having only
one German stop that have been already established before 2013. By 31st
December 2012 the German government stated that 86 authorisations have
existed but many of them were only recently established knowing that
deregulation will come on 1st January 2013. 3
These routes were set up in so called niche markets, most often connecting
small cities with bad rail access, because the former regulatory setting did not
allow for services to other destinations.
Today, new routes are spreading all over the country, connecting primarily
major cities with the highest market potential. Remote areas are also served
which contradicts concerns that deregulation will lead to services only on the
most attractive routes with the highest demand.
Compared to the year 2012 timetable kilometres will be nearly doubled by the
end of 20134, while the number of routes has been nearly doubled within the
first half year by 1st July 2013. According to the Federal Statistic Office, the

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number of passengers in the first quarter of 2013 has already increased by

9% compared to first quarter of 2012.5
Figure 1 describes the rapid growth in the German long-distance longdistance coach network from the start of the deregulation and after half year.
Furthermore, the map on the right side shows high-density corridors where a
high number of operators could have potential to survive in the market.

Figure 1 German Intercity Bus Network

Source: KCW GmbH

The bus operators are mainly small and medium sized companies. They often
work together in a partnership or cooperation as one brand in order to act as
one large company on the market with one central sales platform. Some of
those brands such as Flixbus or Deinbus present the services of their partners
in a common sales platform, but focus on the role of a distributor only. It might
happen that one route of an operator is sold on different platforms (sometimes
with different prices). Then, customers might not know which company they
are going to travel with until they show up at the bus stop. All operators such
as Deutsche Bahn, MeinFernbus, Deinbus and Flixbus work with
subcontractors, which are local small and medium-sized companies.
Large or state-owned companies such as Deutsche Touring or Deutsche Bahn
are not very active so far. Both operators were expected to be ready to

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expand existing and start new services at the time of the market opening but
their market behaviour is rather hesitant so far.
Deutsche Bahn had the advantage to serve routes from and to Berlin even
though parallel rail services existed. This was a relic of the time when
Germany was divided.
Deutsche Touring, which formerly belonged to Deutsche Bahn, is the largest
German operator for international routes between Germany and cities all over
Europe.
Because of its special competitive advantage in terms of the restricted and
monopolistic market structure, Deutsche Bahn was leading the long-distance
coach market in terms of service kilometres before deregulation for years. In
the meantime Deutsche Bahn was overtaken by privately owned in particular
small and medium-sized bus operators and start-ups, which brought an
innovative spirit and dynamics into the market. But there is still a lot potential
for newcomers and established operators, because there are still numerous
established routes with distances beyond 50 kilometres between stops and
where no rail connection exists with a journey time up to one hour.
Nevertheless, still today operators do not provide tickets between those stops
at all. Deutsche Bahns market share in terms of timetable kilometres has
dropped sharply between the year 2012 (average value) until the reference
period from January to July 2013 as is shown in figure 2. The figure
distinguishes between five groups of ownerships: operators owned by
Deutsche Bahn (1), operators in public (2) or private ownership (3), operators
which are in both public and private ownership (4) and operators which are
part of a group company (5). While private companies have been able to
expand their market share by nearly 20 per cent, group companies such as
National Express move forward in small steps.

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Figure 2 Estimated Market Shares of Operators by Timetable Kilometres

Source: Own Calculations

With the new founded group ADAC/Deutsche Post AG, which is a jointventure of a national automobile association and Germanys largest courier
company (formerly state-owned) a big player has announced to enter the
market by autumn 2013. It remains open how strong and quickly the large
international players will reinforce their efforts in the German market.
In contrast to the aviation sector it is fairly new German coach operators
introduced yield management when calculating their ticket prices. There are a
lot of companies offering tickets for one Euro when booking in a specified time
window before the journey starts. The current walk-up fare for express coach
is on an average value of about 14.50 per 100 km, while walk-up fares for
train journeys are with 29.34 per 100 km on corresponding routes are at
least twice the coach price. Figure 2 shows the great advantage of coach
prices in comparison to the train prices for both, walk-up fares and special
fares.

Figure 3: Fare level of express coach and train tickets

Source: Own Calculations

4. ANALYSIS
We have collected a sample of 107 German routes at the reporting date of 1
January 2013 and 154 routes at the reporting date of 1 July 2013. The
number of routes has nearly doubled and is growing continuously.
1.1. General Characteristics of the Changing Long-Distance Coach
Network
For calculating the level market concentration for each route we applied the
Herfindahl index. First, I calculated the market shares for each operator on
each route using the rules of formula 1:

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market share

route 1
operator A

1
1
frequency route
timetable kilometresroute
A
A

(1)

operators=1

frequency

route 1
n

timetable kilometres

route 1
n

Then, I calculated the Herfindahl index per route as follows:

N

H route 1= marketshare 2i (2)

i=1

While the formulas are rather simple the calculations are not, because
operators rarely serve identical routes with one and the same profile regarding
stops, frequency etc. which would be easy to compare. Rather, operators
serve some identical parts along competitive routes, but differ in exact line of
those. So each part had to be calculated manually.
A Herfindahl-Index close to zero is interpreted as a low market concentration,
which means a high number of competitors serve this route, whereas a
Herfindahl index equalling one resembles a monopolistic structure, with only
one operator serving a route. If two operators serve one route with equal
shares the Herfindahl index would turn to1/2 by calculating 0.5+0.5.
In this sample the overall Herfindahl index at the start of the year is very high
with 0.8, whereas already after half a year the total market concentration
decreased to H=0.6. That means there are two competitors on each route in
mean.
For comparison reasons and because of high varying route structures as
discussed below I use the ratio of fare per 100 km instead of implementing the
original fare in the analysis. The average ticket price in our sample has
decreased from 15.9 /100km in January by about one /100km in July 2013.
This could be explained by the continuously growing competition in the
market.
Table 1 summarises the descriptive statistics in short, contrasting the mean
values as of 1 January 2013 and the status half a year later as of 1 July 2013.
Some of the standard deviations are rather high, because the routes in the
network differ highly from each other and vary in structure enormously.
The data show that average frequency per day which are measured in
departures per route having decreased from 3.4 to 2.5 on average in the first
six months after the market opening. It should be clarified that this is due to
the increasing number of new routes and the operators strategy to test
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whether their service will be accepted by customers before expanding or

reducing their service. Nevertheless, the average frequency is subjects to a
relatively high standard deviation with 5.8 departures in January and 4.5
departures in July. The average distance per route also varies enormously
from each other with more than 200 km. The average distance per route has
been increasing from 308 to 359 km from January to July. Usually, operators
provide six stops per route which slightly increased since the beginning of the
year.
Table 1 The routes in descriptive statistics
1 January 2013 (N=82)
Variables

1 July 2013 (N=149)

Mean

Std. Dev.

Mean

Std. Dev.

3.4

5.8

2.5

4.5

distance in km

308.6

209.2

359.3

215.8

travel time coach

04:09

02:48

05:06

03:04

number of stops

6.0

4.6

6.7

5.1

fare coach per 100 km

15.9

8.7

14.9

6.9

fare train per 100 km

29.2

7.1

30.2

10.6

changes with train

1.0

0.9

1.1

1.2

travel
coach
Berlin

0.3

0.1

average frequency per day

time

advantage

0.4

0.5

airport

0.4

0.3

international

0.2

0.2

Herfindahl index

0.8

0.2

0.6

0.3

Regarding rail as most competitive mode, I also added the number of

changes on rail routes (changes with train). Each trip by bus would require
one change by train on average for the alternative rail link, which might attract
customers to take the bus instead of the train, because of the direct link. The
variable travel time advantage coach is included as a binary variable, turning
1 when the operated route by coach is faster than the corresponding rail
connection, turning zero otherwise. Usually, it is the big advantage of rail
services to be much faster than buses. Here the data show in 30 per cent the
coach offers a faster service from start to destination, which has decreased
slightly from the beginning of the year. This might be due to the regulatory fact
that coach routes are not only allowed anymore when they improve the
existing transport services (usually by train in the past).
I also included a number of binary variables describing the types of
destinations served by operators. Therefore, I included the variable Berlin, set
to one for routes serving Berlin, the variable airport, set to one for routes
including airport stops and the variable international for routes running
abroad, which are set to zero otherwise. Due to the long monopoly of
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Deutsche Bahn, 40 per cent of the routes have connected the capital of
Germany, being served by BerlinLinienBus the formerly dominant operator in
the network.
1.2. A first glimpse on recent regression results
I conduct four ordinary least square regressions to investigate whether the
long-distance coach market in Germany is contestable. The results are
summarised in table 2, below. Therefore, all numeric variables are
transformed by taking their natural logarithms in order to standardise the
different measures. The fare per 100 km serves as the dependent variable
which can be explained by a number of exogenous basically cost-driving
factors.
Table 2 Regression results on contestability
Model
dependent variable:

OLS 1
January 2013
ln fare coach per
100 km
-0.33*** (0.08)
0.05 (0.03)

OLS 2
January 2013
ln fare coach per
100 km
-0.37*** (0.07)

OLS 3
July 2013
ln fare coach per
100 km
-0.31*** (0.05)
0.03 (0.02)

ln distance
ln average frequency
per day
ln number of stops
0.27*** (0.06)
0.23*** (0.06)
0.22*** (0.04)
ln Herfindahl index
0.16 (0.11)
0.16 (0.11)
0.20*** (0.05)

Berlin
-0.18 (0.08)
0.00 (0.02)
Airport
0.24** (0.08)
train changes
Constant
4.19*** (0.42)
4.28*** (0.35)
4.16*** (0.25)
Multiple R
0.48
0.50
0.39
Significance level
0.00
0.00
0.00
*** ** *
, , , Significant at 0.01, 0.1, 1 and 5%, standard errors in parentheses,

OLS 4
July 2013
ln fare coach per
100 km
-0.27*** (0.04)
0.06* (0.02)
0.17*** (0.04)
0.17*** (0.05)
0.11** (0.03)
3.98*** (0.24)
0.42
0.00

As one of the results distance and the number of stops turns out be overall
highly significant in all four fare-setting models. Both sign can be interpreted
as follows: The longer the route, the higher is the price. The more stops
operators serve during a journey the higher the fare develops. The reason is
because the more frequently operators stop along the route, the higher fuel
consumption and idle times increase, which make a journey more expensive.
The average frequency shows no significant influence on the fare level,
besides little effect in OLS 4.
It is remarkable that at the very beginning of 2013 the overall high Herfindahl
index has no significant influence on the fare-setting policy of operators. At
least at the beginning of the deregulation, but I have to reject the hypothesis
stated at the papers very beginning, because the regression results show the
highly significant competitive factor of the Herfindahl index beside significant
cost-driver variables as of July 2013. That means the less concentrated a
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route can be served, the higher operators set their fares, which leads to the
assumption that no fear of market entry exists. I assume that the high and
continuously growing level of competition lead to predatory pricing, so
operators can get a foothold in the market.
Additionally, OLS 4 leads to the conclusion that operators serving routes with
bad rail connections in terms of a high number of train changes have the
chance to set higher fares for coach tickets.
Furthermore, binary variables for Berlin or airport connection show significant
influences on the ticket price as this might be a remainder of the closed
market. On the on the one hand, there is Deutsche Bahn which was allowed
to operate almost solely and connect cities throughout Germany to Berlin, for
years. On the other hand niche markets already existed connecting usually
airports, as they have less access to the rail network.
Overall, the variables chosen in OLS 1 and 2, describe the fares set in the
beginning of the year a little better than the significant variables in the second
part of 2013. Some of the explaining variables at the beginning of 2013 even
lost its significant influence over time. This leads to the conclusion that not all
factors have been included in the model.
5. CONCLUSION
As a first glimpse of the results it seems that the German long-distance coach
market provides a high level of competition but is not perfectly contestable at
least at this stage. Obviously, at the very beginning of the deregulation
operators have been setting their fares in the fear of market entry by new
competitors, whereas after half a year predatory pricing outweighs the large
increase in competition. Though, it is not clear whether large operators such
as Deutsche Bahn or other global players will enter the market more
aggressively, in future. However, it is too early for final assessments as the
German long-distances coach market just emerges out of nothing.
What we can see is a rapid growth of the network still offering a large number
of attractive niche markets with high potential.
At least so far, it seems the regulatory framework has reached its aim of
supporting the development of a new transport mode in Germany. For
regulatory authorities it needs to be evaluated again after a certain period of
time in the future whether the developments meet the initial intention.

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10

Therefore, a final assessment of the markets stability and contestability is not

possible today, but should be re-evaluated at least after two years.

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BIBLIOGRAPHY
Baumol, W. J., J. C. Panzar & R. D. Willig (1982) Contestable Markets and the
Theory of Industry Structure, Harcourt Brace Jovanovich, New York.
Bailey, E. E. (1985) Deregulating the airlines. Vol. 10. The MIT Press.
Button, K. J. (1985) The Contestability of the U.K. Interurban Bus Market
Transportation Research Record, 1012, 31-37.
Cowie, J. (2012) Contestability in bus markets - evidence from the British
deregulated market, Applied Economics, 4777-4785.
Karl, A., (2013) Legal and Organisational Developments in the German Land
Passenger Transport, Paper to be presented at Workshop Governance,
Ownership, and Competition in Deregulated Public Transport Markets,
Thredbo 13 Conference, 15-19 September 2013.
Jaffer, S. & Thompson, D. (1986) Deregulating express coaches: A
reassessment, Fiscal Studies, 7, 45-68.
Schiefelbusch, M. (2013) Past and Future Regulation of Interurban Coach
Services in Germany. Journal of Transport Economics and Policy, 47, 299305.

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NOTES

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1 see
2

42b PBefG in relation with EU Directive 2001/85/EC

see printed matter 17/14446 of Deutscher Bundestag dated 29th July 2013

3 ibid
4 Extrapolation
5 Federal

based on own calculations.

Statistics Office (Statistisches Bundesamt), table 46100-0005