Economics serving society

Merger analysis and public transport service contract

Philippe Gagnepain, Chantal Latgé-Roucolle et Marc Ivaldi

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Assessment of the effects on social well-being of a merger of two firms in the public sector context is a crucial matter. In the urban transport industry in France, the possibility of managing a network is allocated to transport operators after it has responded to a call for tenders. This is the principle of competition to win a market, according to which the winner is the one that proposes the lowest service costs. The merger in March 2011 of two of the main operators, Véolia Transport and Transdev, is an example. Indeed, economic theory suggests that the participation of the greatest number of bidders in a tender process increases the intensity of the competition upstream and is thus beneficial for society as a whole. A merger is, then, potentially damaging for competition and should be accepted by competition authorities only if it guarantees sufficient efficiency gains in the firms that therein join their productive forces.
In this article, Philippe Gagnepain, Chantal Latgé-Roucolle and Marc Ivaldi show that such efficiency gains exist and are important. Transport operators intervene simultaneously in several towns and accumulate experience; they create effects called “networks”, which allow them to improve their productivity. More precisely, an efficiency gain obtained by an operator in one town benefits all the other towns in which it does business. These network effects explain why we observe a limited number of operators in France.
Original title of the article : “Merger analysis and public transport service contract”
Forthcoming in : Competition and the role of the State (2014)
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