The Funny Economics of Buses

In the course of chasing data in India, I spent a lot of time on buses. While all buses seemed the same to me (save the luxury buses), apparently some are operated by the government and the others by private companies. There is very little to distinguish the two upon first site: both are kind of rickety looking and are often stuffed to the brim.

I had an interesting conversation with a member of the TN Planning Commission on the topic of buses. He pointed out that, excluding the luxury buses, both private and public buses are highly regulated. In this case, all non-luxury buses cannot charge more than 28 paise per km.

Here is where it gets interesting. Apparently private buses are running at a profit while public buses are running at sizable losses. Not only that, the non-luxury sector is profitable enough that there are multiple private carriers in the markets (this suggests that, despite price regulations, barriers to entry might be rather low).

Why is this so? As I mentioned earlier, private and public buses offer the same amount of luxury and personal space. Not only that, both buses run around the same time and take about the same time to reach their end destination. Then what gives? Here are some theories:

Exploitation of Labor: The planning commission member suggested that private bus companies operate on lower costs by stretching their labor inputs to the fullest. Apparently, this is a well known phenomenon - at least well known enough to warrant some air time on this blog.

I'm not too sure about this explanation. Why don't exploited drivers find employment opportunities at other bus companies, that might offer more competitive salaries or perks, or with the government buses? What about employment opportunities outside of driving buses (such as driving lorries)? Unless there are some weird frictions in the labor market (ex 1: perhaps bus drivers are easy to replace and there are few outside opportunities for bus drivers in other sectors, thus giving bus drivers little bargaining power; ex 2: private bus companies collude with each other), I'm not sure if this can fully explain the profit difference.

Competition on Other Margins: Another explanation is that private buses make their meal on margins other than service quality, time to destination, etc. The planning commission officer noted how, on inter-city trips, private buses dilly-dally around, picking up lots of customers, making up the difference by booking it on the highways. Public buses on the other hand are forced (by regulation) to make timed stops and have to sign off on their time of stopping at various points on the journey. The point is that private buses are able to allocate the journey time more productively by spending more of it in areas where more customers can be picked up.

Ultimately, while I think the second explanation is compelling, this is still a bit of a riddle. I wish I had more time to observe what exactly is happening. If any of you have experienced Indian buses, or have thoughts on this puzzle, please post your comment.