Acquisition, efficiency and scale economies: An analysis of the British bus industry

Abstract

The British Bus industry has undergone considerable transformation since privatization. Five major operators have emerged to dominate the market, a position almost exclusively attained through acquisition. This paper reviews the economies of scale argument commonly cited for this change and gives an overview of the acquisition process. It questions whether this argument gives a complete explanation for this industry development. For 58 individual companies, the level of technical efficiency attributable to firms operating at or near the optimum level of output is examined over 5 years to determine if mergers in practice have resulted in scale economies. Technical efficiency is estimated using data envelopment analysis, under assumptions of constant and variable returns to scale. Efficiency scores are then regressed on a time trend and a merger dummy to test whether acquired firms' efficiency has significantly improved above the average. It was found that over the period, efficiency had improved. This improvement, however, cannot be wholly attributed to the achievement of economies of scale. More specifically, there has been an improvement in the internal efficiency of acquired firms and some scale economies within group companies, the latter of which may have resulted from the eradication of competition.