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This article uses game theory to explore the situation of bus operators when there is competition on stage-carriage, or local, bus services, as is proposed in the recent British White Paper 'Buses' (Department of Transport, 1984), and as exists in the Hereford area at the time of writing. The Hereford area is one of three so-called 'trial areas' set up under the Transport Act 1980 where the provision of bus services is unregulated, although operators still have to meet the usual safety requirements.
Our model is very simple and could be developed further. Nevertheless it provides some insights into the position of operators under competition, and an interpretation of some of their actions. It also suggests one rationale for regulation. Regulation can be seen as a device to avoid the worst possible outcome for the public that might arise under competition at the cost of giving up the best possible outcome.
Game theory is concerned with the logic of decision-making in situations where outcomes depend on the decisions of two or more autonomous agents, and each agent therefore has only partial control of the outcomes.