Introduction
Transport for London (TFL) is a transportation agency created by the government in 2000 to manage the public transportation system. TFL is responsible for managing the London underground system, Docklands Light Railways (DLR), Tramlink, peripheral heavy rail, ticketing services, taxicab services, taxes, and road safety. As per the government ruling in the 1990s, in order to increase competition, private players were allowed an entry into the transportation market. 100% of the London underground, Tramlink and DLR are owned and operated by TFL, but London road transport consisting of bus and taxicab services is mostly contracted out to many national and international players. Airport services as well as peripheral and heavy rail is also operated by private players under the guidance of TFL. TFL manages close to 25% of the total transportation revenue, whereas the rest of the transportation revenues are controlled by the private parties. As TFL controls the key assets for transportation like the underground rail, Dockland rail infrastructure, bus and taxi cabs, it commands a monopolistic position in this market (TFL, 2014). Other players do not have this advantage of TFL, and they are not in a position to replicate these resources. Like many government agencies around the world, TFL may also become inefficient for owning most of the key assets and having a monopoly in some segments of the market like the London underground. Therefore, it is important for the government to create a performance management and performance measurement framework to continuously monitor and improve TFL’s operations and activities. This essay will discuss the evolution of different economic theories of government regulated and monopolistic market, and then will attempt to come up with a performance management framework for TFL to make it efficient in the monopolistic market.
Performance Management and Performance Measurement
Most of the companies around the world believe that they have implemented a performance management system, when in reality, they are merely measuring some performance measurement parameters. There is a huge gulf of difference between performance measurement and performance management systems (Randall, 2006). For instance, the performance measurement of the UK Olympic team can be determined by taking into account how many Gold, Silver and Bronze medals they have won in the Olympic, or their relative position in the medals tally. However, by looking at those numbers, it is impossible to conclude as to how to achieve the desired numbers. For that, the Olympic team needs to implement a performance management system that will focus on the type of trainings given to players, their diet, and the equipments and facilities used by them. To ensure that a company or a team achieves the desired performance measurement level, it is not only important to implement a performance management system, but as a part of that performance management system, proper budgets and resources should also be allocated (Randall, 2006).
Monopolistic Competition
Diagram 1: Monopolistic Competition (Economics Online, 2014)
The concept of monopolistic competition was introduced by Edward Chamberlin in 1933. Monopolistic competition refers to the market structure in which the competitors sell products slightly different from each other. It is a rare market structure not found in many industries (Keppler, 1994). Restaurants in a big city are the classic examples of monopolistic competition as each of the restaurants offers menu slightly different from each other, yet they compete for grabbing the same customers. A monopolistically competitive market has the following characteristics:
- No firm in a monopolistic market enjoys a huge market share.
- The products sold by each firm slightly differ from one another.
- In a monopolistically competitive market, each firm can take an independent business decision as regards the price and output of their products.
- In this market, most of the competitors have enough information as regards the product features of one another, but that knowledge is not comprehensive (perfect) as the knowledge about some of the features may remain unknown to them (Keppler, 1994).
- A monopolistic market does not have any major barrier of entry or exit.
- Monopolistically competitive firms are able to maximize profits by creating product differentiation (Keppler, 1994).
As seen from the above, in a monopolistic competition, the monopolistic players have a unique product advantage and due to this, they can charge high price and earn large revenues. However, in the case of TFL, it operates in a monopolistic market, being the only player in the London transportation system capable of offering a comprehensive transportation solution in terms of providing underground, heavy rail, river transportation, and bus and taxicab services. Other players in the London transportation industry operate either one or two segments. This situation makes a unique product advantage for TFL, making it a monopolistic player in the transportation industry.
The Classical Economic Theory and Monopolistic Competition
According to the Classical Economic Theory, markets operate based on the concept of laissez faire where the market forces determine the price. As per this theory, the role of the government is not recognized, and any kind of government intervention can only make the market inefficient (Becker#3, 2013). Classical Economists believe that business investment and consumer spending are the most important parts for a nation and its economic growth. Too much government spending and intervention take away the valuable economic resources required by the businesses. The government involvement in turn retards a nation’s economic growth by creating inefficient public sector units and reducing the perfect market competition. As per the Classical Economic Theory, a market is only efficient if there are adequate availability of perfect information and the existence of multiple players in the market (Becker#3, 2013). The Neoclassical Theory introduced the concepts of monopolistic competition and the imperfect market.
According to the Classical Economic Theory, a monopolistic player becomes inherently inefficient in the long run. The key assets owned by TFL give it a unique product advantage that cannot be replicated by the competitors. Furthermore, TFL is backed by the government, and therefore, even if TFL suffers a huge loss by operating inefficiently, the government can cover up the loss by providing monetary help. Because of this reason, there is no incentive for TFL to operate efficiently in the market as it has nothing to lose. According to the Classical Economic Theory, TFL will, therefore, become inefficient in the long run, because the fair market policy does not apply to it as it receives undue advantage from the government.
Gary Becker’s Theory and TFL
As per the Classical Economic Theory, monopoly and monopolistic competition are always inefficient. In the case of a monopoly, the organization enjoying the monopoly will try to maximize its profits by making consumers pay higher prices for the products and services (Becker#3, 2013). It is, therefore, argued that in the case of monopoly, the government should be involved in the market, because it is widely believed that the government will be better than the private firms in terms of providing products and services at a rational price. Therefore, Becker like the classical economists strongly argued against monopoly in any kind of economy. However, Becker and Posner supported monopolistic competition. According to them, there is no correlation between monopolistic advantage and inefficiency (Wolfers, 2014). In fact, they argue that if that monopolistic advantage comes from bureaucracy or formal rules (government), then the organizations operating in a monopolistic market can offset their disadvantage of inflexibility and probable inefficiency through scale and scope (Wolfers, 2014). Posner and Becker also said that efficiency cannot be defined in an absolute sense. It is a relative term. A government regulated agency can be termed as efficient if it thrives in a competitive sector. Otherwise, the other players will outcompete the government agency (Wolfers, 2014). Therefore, they argue that the government agencies will be able to work more efficiently in the long run even if a small competition is introduced in the market.
In the case of the London transport market, TFL is the big bureaucratic player who commands the maximum market share and unique product advantage. It is also supported by the market regulators. Therefore, as discussed in the above section, TFL will become inefficient in the long run, which was perceived by the government planners, and therefore, some competition was introduced in the market. As discussed in the previous paragraph that as per Posner and Becker, even small competition gives incentives to the monopolistic firms to improve upon their operational process. Therefore, looking at the current market dynamics of the London transport, it can be said that if the government does not intervene in the business affairs of TFL, then TFL will remain efficient in the long run.
Jean Tirole, Game Theory and Market Regulations
Instead of working on theories of efficient markets, Jean Tirole’s economic ideas revolved around inefficient market dynamics. According to Jean Tirole, most of the market conditions existing in the world are inefficient. Then also, it is seen that these markets reach some sort of equilibrium. John Tirole’s work shows that inefficient market may also reach an equilibrium that can be predicted using the Game Theory and Theory of Mechanism Design (Appelbaum, 2014). As conditions differ in each imperfect market, the way a market can reach equilibrium also varies. Unlike the Classical Economic Theory and the concepts of Becker and Posner where theoretical framework applies to all the market conditions equally, Tirole’s prescription for market regulators varies depending on situations (Appelbaum, 2014).
According to Tirole, the situation of TFL is unique. As per the Game Theory, if TFL remains inefficient, it will start losing business in the bus, rail, and taxi cab business. If TFL remains efficient by continuously improving its process and assets, then it will continue to retain its market share. In fact, because of its unique product advantage, it may be able to increase the market share. If the government intends to run TFL as a cost plus firm, then the government may end up losing a lot of tax payers’ money if it runs TFL inefficiently. On the other hand, if the government runs TFL as a fixed cost plus incentive way, then even if TFL is run inefficiently, the government does not lose any money over the standard fixed cost. Therefore, according to the Game Theory, the equilibrium in this case will be the government taking a position of fixed cost plus bonus structure for TFL and TFL will be encouraged to run the company efficiently as it will receive an extra bonus from the government.
Performance Management and Measurement Parameters
Before devising a performance management system, the goal of the TFL is to be first understood. The goal of TFL, in this case, is to provide a transit experience, which is reliable, high quality, timely and cost-effective, to its customers. The goal will be to continuously achieve performance measurement parameters better than the competition or close to benchmark standards in these four areas (Randall, 2006). Performance measurement parameters for TFL should be as below:
- Reporting the performance of public transport
- Regular reporting through annual reports, sustainability reports, and public news releases.
- Reporting in the areas of availability of transportation per unit of time, efficiency, the number of passengers carried and so on.
- Monitoring service improvement
- Increase in the number of riders
- Increase in the number of passenger kilometers
- Diagnosing problems and the health of the system
- Average age of the assets
- Maintenance costs
- The number of accidents
- Customer satisfaction index
- Responding to user feedbacks as percentage of total user feedback
- The implementation of performance improvement initiatives
- The number of performance improvement initiatives and suggestions to the government
- The number of new projects in the pipeline
- The number of new projects completed in the current year
Conclusion
TFL is operating in a monopolistic market in which it has the advantage of holding key assets, unique products, and the support of the regulators. As per the Classical and Neoclassical Economic Theories, in the long run, TFL will become inefficient and will turn into a cost burden for the government. However, most recent economists like Becker, Posner, and Tirole think otherwise. Becker and Posner suggest that even if the government can introduce small competition in the monopolistic market, then TFL will remain relatively efficient in the long run. Tirole, on the other hand, thinks that the main incentive for Tirole to remain efficient in the market is how the contract between TFL and the regulators is created. If the government provides a bonus to TFL for cost improvement or superior performance, then TFL will perform more efficiently as it will feel incentivized because of the bonus. It is important to capture the performance measurement parameters that can effectively measure the performance of TFL against other players.
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