Policy implications of the dissertation

The results obtained from this dissertation have some important policy and managerial implications for the bus industry.

1. Efficiency improvement

As indicated by Gomez-ibanez and Meyer (1993), a primary motivation of government privatization has been a widespread belief that the private sector is

inherently more efficient than the public sector (the so-called property right theory).

A private managed enterprise, motivated by the possibility of profit, may have strong incentives to be more cost conscious, efficient and customer oriented than a public enterprise.

The decomposition of the “return to the dollar” indicates that this increase in profit magin was most attributed to allocative progress rather than to an improvement in technical efficiency. Recall that technical efficiency reflects the ability of a firm to obtain maximal output from a given set of inputs, and allocative efficiency provides information on how the available resources are allocated among the various inputs, that is, transit fleet, labor, and fuel in the supply of transit services.

Two important implications can be drawn from this result. First, the improved components of a firm’s efficiency need to be specify while the property right theory is justified, i.e. technical efficiency or allocative efficiency, or both? Second, as argued by Kao et al. (1995), from the viewpoint of management, both TE and AE concerning the operation management system, basically it takes time to increase the management level. However, it is possible that TE would take more time than AE to be efficient. Because the former requires higher level of technology to obtain maximal output from a given set of inputs, while the latter only need to adjust the allocation of the inputs in optimal proportions, given their respective prices. These may help both operators and policy makers throw light on efficiency improvement process, so as to set up their targets to find a way to enhance overall efficiency.

2. Pricing strategies

Traditionally, when information on each input price and output price are not available, allocative efficiency cannot be estimated. Cases that lead to information on prices being unavailable pose a serious problem for the standard techniques of efficiency measurement, and that alternative pricing strategies influence a firm’s

profit margin through their effect both on expected profits and on the discount rate applied to those profits’ effects that are not taken into account by the standard techniques of efficiency measurement. To solve these two problems, this paper turns to an alternative hyperbolic graph efficiency measurement which was proposed by Fare et al. (2002). This alternative gauges efficiency relative to frontiers that are not conditioned on prices and hence account for the efficiency of different pricing strategies. These techniques are described to analyze how their measures of efficiency differ and how they are related to the profit margins of firms. To illustrate the importance of accounting for price distortion in measuring efficiency, this alternative model is employed to study how differences in pricing strategies affect the profit margin of the firms before and after privatization.

The empirical results implies that perhaps in an attempt to cover the inefficiency-induced losses, both SOE and POE apparently resorted to distorting relative output prices with respect to input prices; the distortion being more pronounced in POE than in its predecessor. Apparently, this alternative technique of efficiency measurement may help both operators and decision-makers to set up their targets to reduce the inefficiency through different pricing strategies. As well, due to that privatization had given a great deal of freedom to the newly-established KKTC, this private enterprise is more flexible in adopting various pricing strategies.

3. Size of transit firm

It is often thought that bigger transit firms (or stations) operate more efficiently than small firms (or stations). From the results of the first essay, that stations of approximately 40-70 vehicles are of optimal size, there is evidence that this is not true. That is, size of transit firm does not necessarily play a large role in the efficiency of the firm.

4. Transport risk

Many public policy efforts seek to identify and eliminate the production inefficiency that prevents simultaneous improvements in both efficiency and transportation safety. Whether these types of public policy initiatives are successful depends on the extent to which such inefficiencies are widespread in transport services, especially in intercity bus services. This study measures the efficiency changes before and after privatization where transport risk as a joint but undesirable output can be reduced with efficiency improved concurrently among a set of stations producing bus services. This may help producers, consumers and policy makers to pay more attention to the overall safety performance of bus transport, so as to meet both business and social goals.

5. Black box

Fare and Grosskopf (2002) indicated that the traditional models for DEA-type performance measurement are based on thinking about production as a “black-box”.

Inputs are transformed in this box into outputs. The actual transformation process is generally not modeled explicitly; rather; one simply specifies what enters the box and what exits. This is, in fact, one of the advantages of DEA-it reveals rather than imposes the structure of the transformation process. The network DEA model allows to study the “inside” of the usual black box technology. They accomplish this by providing a very general framework for specifying the inner workings of the black box.

In this study, by explicitly modeling intermediate products, i.e., produced and used services inside the technology, the actual transformation process of bus service reveals. This may help operators, consumers and decision-makers become aware of the whole production and consumption processes as well as the trade-off between efficiency and effectiveness measures, so as to elevate the overall performance of bus transit systems.