1.
0 Introduction
Singapore’s public transport is one of the most cost efficient transport services in the world.
Bus service in Singapore is the mainstay of public transport. Taking a public bus is one of
the most useful and accessible modes of public transport in Singapore. It is 60% of the total
public transport services. According to economic studies, the economic cost of transport to
an individual is 8.9% of Gross Domestic Product (GDP) per capita. The Public Transport
Council (PTC) in Singapore is regulating the operations.
In Singapore, there are four main public transport services as follows:
Go-Ahead Singapore
SBS Transit Ltd
SMRT Buses Ltd
Tower Transit Singapore
Where there are more than one bus services, Cournot Oligopoly market structure is
occurring. Cournot Oligopoly model is the most popular model of imperfect competition.
Imperfect competition refers to the case of firms that individually have some price-setting
ability or market power but are constrained by rivals. There are only four main public
transport services in Singapore and barriers to entry. It shows identical cost and identical
products. Firms set their quantities independently and simultaneously. The firms set
quantities, the price adjusts as needed until the market clears and profits are interdependent.
2.0 Best Response by SBS Transit
The best response of SBS Transit showed via mathematical equations as follows:
The assumptions are as follows:
All firms are assumed to be identical
All firms have identical cost structure (MC1 = MCn)
They produce output simultaneously and independently
Significant barriers to entry
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A firm maximizes profit with best responses that come from MRr = MC
Best Response by SBS transit
2.02 = a
DM
Q
b = a/Q1
Let a = 2.02, Q = 4, 000, 000
q1 = a – MC1 / b (n + 1)
Let MC1 = 0, Since Picking up another passenger is close to Zero cost.
q1 = 2.02/0.000000505 (4+1)
= 800, 000.
Q* = q1* + q2* + q3* + q4*
= nq1*
= 4 x 800,000
= 3.2M
P* = a – bQ
= 2.02 – 0.000000505 (3,200,000)
= $ 0.42
3.0 Cournot Equilibrium
Cournot Equilibrium is used to determine the most profitable output in an industry. The
Cournot equilibrium equation assumes that at least two firms are participating in an industry;
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these firms control the means of production and do not engage in collusive behavior. Each
firm chooses its output levels independently from its competitors, and the market, not the
firms, determine the sale price.
Instead of a competitive environment, in which the firm's output does not directly affect its
competitor, the Cournot equilibrium examines a duopoly, in which one company's revenue
depends on both its own output and the other firm's output.
There is Cournot model of oligopolistic competition market structure in customized bus
service in Singapore.
According to the Cournot Equilibrium,
Let the market demand curve be: P = a – bQ
P = Market price
Q = Market quantity
Assume there are n number of firms
Let Q = q1 + q2 + ……………+ qn
Where q1 = output of firm 1
q2 = output of firm 2
qn = output of firm n
TR1 = Pq1
= (a – bQ) q1
= (a – b [q1 + q2 + ………………..qn]) q1
= aq1 - bq12 – bq1 – q2 ………………bq1qn
MR1 = 2TR/ 2q2
= a – 2bq1 – bq2 - …………bqn
= a – bq1 – bq1 – bq2 - …………. – bqn
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= a – bq1 – bQ
Let MR1 = MC, as firm 1 seek to maximize its output
a – bq1 – bQ = MC1
Assume all firms are identical
Let q1 = q2 = …………………….= qn
a – bq1 – b (nq1) = MC1
bq1 + bnq1 = a – MC1
b (n+1) q1 = a – MC1
q1 = a – MC1/b (n+1)
Best response of firms, since all firms are identical, they will have same response curve. It is
a type of Nash Equilibrium, because all firms best response. A set of quantities chosen by
firms such that holding the quantities of all other firms constant, no firm can obtain a higher
profit by choosing a different quantity. The quantity of equilibrium must be on the best
response curve for all firms.
4.0 Viable Cost Strategies by SBS Transit
SBS Transit can apply some viable cost strategies in an attempt to discourage competitors
from entering. The cost strategies are viable from a pragmatic perspective in the context of
SBS Transit. Applicable Viable cost strategies as follows:
New technology and leading technology that reduce cost (MC )
Increase switching costs for customers (for example: selling one-year membership)
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Learning and adapting to lower AC
5.0 Cournot Equilibrium After Deregulation
After deregulation, it is highly likely that there will be more competitors entering. Assume
there is one more competitor entering the customized service bus hailing market as the
population of Singapore is expected to increase to 6.9 million.
q1 = a – MC1 /b (n ++)
= 2.02/0.000000505 (5+1)
= 666,667
Q* = nq1
= 5 x 666,667
= 3,333,335
P* = $ 2.02 – 0.000000505 …. 3,333,335
= $ 0.34
After deregulation, the output of each firm falls as the price of the customized bus ride hailing
service falls. If there are more firms entering the market, the output of each firm will fall
further and the price falls further.
As n – (infinity), the cournot equilibrium will revert back to perfect competition.
6.0 Conclusion
Good public transport is the answer to contest the ever-looming problems of traffic jamming.
The customized bus services will form the backbone of the public transport because of its
flexibility and low cost. If the public transport is not good enough yet, the other available
resources should be considered, until a more permanent solution is found. The future of
customized bus service for customers is bright because there may be more bus service
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providers after deregulation that after a lower price. The future for bus service providers is not
as optimistic if competitive rivalry increases. This is make worse with the possible entry of
new entrants. By offering a lower price, profits may decline.
Competition is necessary to improve operational efficiency and quality of bus services. A bus
monopoly without competition can lead to deterioration of services and inefficiency, with the
public suffering insufficient coverage, poor frequency, poorly maintained buses affecting
safety and comfort or even high fares. However, inefficient competition is a great
disadvantage to the customers.
An oligopoly market also has other important characteristics particularly in terms of the price
reaction of competitors. Price can be changed although it is determined when competitors
altered the price. For example, the volume of goods or services produce can not be able to
increase even though the price is decreased because the competitors will decrease the price in
the same rate or even more. Furthermore, if the entrepreneur increases the price but the
competitors do not change the price will lead to less volume of goods and services consume
by consumers.
7.0 Recommendations
As there are barriers to entry, it is better to do not make further investments by the new
entrants. Due Singapore is a small country; the market is suitable for small number of service
providers. The Cournot equilibrium is sustainable and it is not changing to Stackelberg
equilibrium. There will be a significant cost advantage if any firm can reduce its costs before
the other firms. This implies that if a firm can seize market share and be the leader, the
constraints of the Cournot equilibrium will not apply. The leader can set its output first and
impose switching costs on customers to retain its market share.
The government should spend more money for improving public transport and encourage
people to increase public transport usage.Technological improvements will caused to
efficiently and cost-effectively services. The bus companies have to be forward looking and
implement technological improvements to deliver bus services efficiently and cost-
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effectively within the maximum fares approved by the regulator. Where there are more than
one bus operators, launching a common fare card and facilitating multi-modal transfers are
beneficial to commuters and encouraging the use of the public transport system.
Entrepreneurs should increase the frequency of services as well as the number and variety of
vehicles available to passengers and each vehicle should run at full capacity. The most
important policy implications and recommendations are to improve the efficiency in terms of
quality, frequency and use of technology
References
Bizfluent, 2017. How to Calculate Cournot Equilibrium, Available at:
https://bizfluent.com/how-12136356-calculate-cournot-equilibrium.html
Local Bus Market Study, 2016. Report to the Department for Transport, Available at:
https://assets.kpmg.com/content/dam/kpmg/pdf/2016/01/local-bus-market-study-
access.pdf
Land Transport Authority, 2017. Public Transport, Available at:
https://www.lta.gov.sg/content/ltaweb/en/public-transport/buses.html
Menon, G. and Kuang, LC., 2006. Lessons from Bus Operations, Available at:
https://www.ptc.gov.sg/docs/default-source/publications-and-papers/
lessonsfrombusoperationsrev5.pdf
The Straits times, 2014. Study:Singapore`s public transport system one of the world`s
most efficient, Available at: https://www.straitstimes.com/singapore/transport/study-
singapores-public-transport-system-one-of-worlds-most-efficient
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